Appraisal value less that agreed price - good for me, no?

15 Replies

Hi all,

I'm currently under contract buying a MF in Pawtucket. After negotiations we agreed on $404K, I was kicking myself for going above $400 when I thought it was worth $389 but it meet the 1% rule and my realtor said it would take this much.  Original asking price was $439.  This is my first time.

Well the appraisal came back and it was valued at $387... Since we have to buy this through FHA my loan stops at $387. Everyone I talk to says this is really in my favor but the seller is really pushing back and in my opinion my realtor is letting him. The seller said he would come down a little but is taking away several concessions too (fixing old windows, etc). What I'd like to do is tell the seller he needs to keep all agreements in place and come down or we walk, my realtor advises against that but I think he's just trying to close to get his commission. The appraised value is stuck on this house for the next 6 months so unless the seller finds a cash buyer or someone with a better down payment no one would buy the house for more than the $387. As far as I know no one else put in an offer.

I plan on living there and my wife really loves this house, but we are willing to walk if we have to.  It woiuld be hard, but we're willing.

Looking for experience, opinions and advice.

Thank you in advance,

Jeremy

You are on the right path.  Stick with your gut reaction and don't let emotion or outside forces impact your decision.  With no other offers, the seller can either take guaranteed money now or wait it out the next few months, slowly dropping their ask to what you offered months ago.  Don't allow them to try to back you into a corner.  You are in the power position.  If the deal falls apart, you can rest easy that you didn't compromise your financial situation by giving in to others that have ulterior motives.

I'm with Brandon - stand your ground. As you point out, fact that this is an FHA appraisal means that it will be tied to the property for 6 months (i.e., any other buyers that coming along and intend to use an FHA loan will get a copy of this appraisal). The seller doesn't have to accept this lower value (he can terminate the contract if you don't agree to pony up the difference in cash), but its generally in his interest to do so (or at least lower his price significantly). You are in a better negotiating position, use it!

Hey Jeremy,

How much cash flow are you looking at for this property?  You mentioned that it still meets the 1% rule so you were willing to go $15K above what you thought it would appraise for, and since you mentioned this is your first time, I just want to double check that you are using other analytics than just seeing if it meets the 1% rule.  The 1% rule is great for a quick glance as you're going through properties quickly, but there are many properties in my area that meet the 1% rule that don't cash flow to what is required because of how the expenses work out. 

Especially with FHA you are looking at mortgage insurance of around $77 per month per every $100K of purchase price. So your cash flow would be $308 less every month due to the mortgage insurance of the FHA, and that's for the life of the loan unless you refinance out after major sweat equity. A good rule of thumb along with the 1% rule is making sure that the property is bringing in at least $100 per month of cash flow per unit. So a duplex would be bringing in $200 a month of cash flow at a minimum. You likely already know all this, but just wanted to state these things just in case you only analyzed with the 1% rule. Good luck!

- Lucas Duce

This is all very helpful. 


@Lucas Duce , The mortgage insurance, homeowners insurance and taxes are all higher than the average triplex but it would still cash flow (it's a very old home in a historic district). We would live in the owner occupied side, but if we weren't the house would cash flow at about $200 a unit. The other two units cover all of the mortgage (premium and interest) and the majority of the insurance and taxes. We'd have to kick in a little for the rest, pay for the common utilities and save for CapEx, vacancy, repairs etc. Honestly it was an OK deal before but my wife loves it and we could make it work. But if the cost comes down $17K it's much better and I'm not willing to come up with extra cash or give up on the work that was agreed on after the inspection.

Thank you all!

If I were the seller, Id just let you walk. Id just take a conventional loan the next go around instead of an FHA loan and poof, no appraisal sticking issue. An appraisal is simply one persons opinion of value of the property. Get 10 appraisals, they are going to have 10 different values.

@Russell Brazil is right.  This is a common occurrence and given the gap in appraised value vs. contract price, if I were the seller, I'd expect you to compromise some or tell you to get lost.  You are not in a position of strength unless the seller really needs to sell and/or it's a slow market (in which case, you'd have been a position of strength all along).  If you guys plan to live in it, like the place, and don't have many other options, I'd try to work with the seller and find a win/win.  So many people get hung up on little numbers at the end, become obsessed with "winning" and walk away from good deals over a few a grand or two.  If it's a good deal in a good location, I promise you won't even think twice about the minor difference in price in several years.

Hi again,

I appreciate all the input.

@Russell Brazil no one is willing to buy the house on a conventional loan, at least so far (five months on the market). I tried to use a conventional loan but I didn't have the 20% down so could not meet the low income restrictions. We had to go FHA. The Seller told me to go back and get a conventional loan, when we informed him we couldn't. The seller is well-off and a real estate investor, however he is overvaluing the house and is currently cash poor. He needs the funds for this house to fix up several other properties so he can sell them.

I'm willing to compromise a little but I would walk away from what he is proposing.

@Jeremy Trier if I really wanted the house I would compromise on the repairs (you can probably even get them done better and cheaper yourself) and seller concessions but I would not pay above appraisal price given that I feel the appraiser did a good job. Your appraisal doesn't stick with the house for 6 months...your lender ordered it and the only person who will ever see it is you guys. Anyone else who came along gets their own appraisals ordered and at that point yes, they could get another appraiser that maybe does hit the purchase price. If the sellers really in a bind for cash like your last comment says, I would think he would be more willing to compromise.

@Jeremy Trier an appraisal coming in low is not in your favor because all you can do is ask the seller to Lower and if they don’t then you either fork over the extra cash or you walk alway.

Neither of those scenarios is good for you in my opinion.

Sounds like you should walk from this deal.  If the seller is indeed well off he isn't going to reduce his price down to the appraised value.  Being it's been on the market 5 months I would say he is in no hurry to sell.  We have a stubborn person like that near me.  Property has been for sale over 2 years and he refuses to lower his price....

@Jeremy Trier:  ...I plan on living there and my wife really loves this house

One's primary residence is more than an investment.  If you can afford the house, buy it.  In 2010, we purchased our house from a bank with a "highest and best" that was ~5% over the asking price.  The other day I asked my wife if she remembered how much we overpaid.  She did not:).  

Thank you everyone for weighing in.  The seller came down all of the way, I just had to let go of two things he was going to give after closing.  We love the house but there are plenty of nice houses out there.  I thought it was a little overpriced and really felt we could get a better deal.  We close TOMORROW!

@Jeremy Trier   I know the situation is already resolved, but there were only two main things that bothered me. First, you and or your wife "loved" the property. I hope that was numbers based, and not for any other reason. I never fall in love with a property. I have sometimes fallen in love with the numbers. And second, it appears you don't trust your realtor. While it may have worked out this time, you may want to consider changing realtors. It doesn't mean your realtor is not great, but that is a relationship where trust is vital, in my opinion.