Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
Hello, I recently rehabbed a property, put it on the market and it was pending sale contingent on appraisal. The appraisal came in and it came in just $2,000 short. The buyers want to back out since they thought they were getting a deal. Has anyone had issues with appraisals coming in lower? Kinda have a feeling my realtor is not doing his job or something. Please advise. Thank you.
The agents have a very limited ability to influence the appraisal. The real problem is that appraisers seem to use the purchase price as the max they will appraise a property for, while looking for any reason to bring it lower.
$2,000 doesn't sound worth losing a deal over. Drop the purchase price and sell!
The agents have a very limited ability to influence the appraisal. The real problem is that appraisers seem to use the purchase price as the max they will appraise a property for, while looking for any reason to bring it lower.
$2,000 doesn't sound worth losing a deal over. Drop the purchase price and sell!
That's what we're trying to do, but it seems like the buyer wants to back out now since they realized it's not a good deal anymore...
Huh? It sounds like the buyer is jerking you around. If they thought the house was a good deal at, let's say, $50,000, and the appraiser says it's only worth $48,000, why is it not a good or better deal at $48k? Was the buyer hoping it would appraise for $10,000 more than he was offering? Yeah, right.
$2k under should be considered a very good appraisal. Many are compalining when they come in $10k, $20k, or even $40k below price.
Sounds like you need to educate your buyer and their agent.
Let them know that almost all appraisals since the structuring of the new HVCC rules will not bring in purchase appraisals above the contracted price.
Congrats for only getting dinged by 2k. I've had a few that were much worse this year. I would pull my own comps to show them that they are getting a deal. Explain to them that appraisers are scared out of their pants and always opt low in this environment. Do whatever you can to save the deal! In the mean time, read up on J Scott's article about how to approach appraisals. It will help you in your future deals.
Appraisals can be crazy low. I would be fine with 2K and just meet that number if I were you. I've had 20-30 under with the buyer appealing it. Once they have a number they won't back off it. The key is to have the comps in hand to give them and a listing agent that handles this stuff up-front; before a number comes in. I manage this stuff myself now. My LA screwed me by not even meeting the appraiser or providing any comps. What the heck do these people do to "earn" these absurd comissions?
Thanks James, I agree, but they have been playing us like a puppet. Gotta make a firm decision soon..btw, I would take the lower offer, but they said they just want to back out now..not sure if it's their negotiating tactic or not, but I'm just sick of it already..
I wouldn't want to lose a buyer but I also wouldnt want to play too many games. Match the appraisal and tell them that's your best and final. If they walk, find another buyer and stick with your number. If your in a good area and the house is priced right it; will sell soon.
In the contract, are they allowed to back out if you agree to sell for the appraised price?
This is a good point. In SC, the seller has the first option to lower the price the appraised value, and only if they won't do that can the buyer then cancel the contract. Otherwise, they're in default and you can at least keep their earnest money.
In the contract, are they allowed to back out if you agree to sell for the appraised price?
This is a good point. In SC, the seller has the first option to lower the price the appraised value, and only if they won't do that can the buyer then cancel the contract. Otherwise, they're in default and you can at least keep their earnest money.
A big determining factor will be whether it's an FHA loan and whether you signed the standard FHA addendum to the contract.
In my state, the standard FHA addendum used to say that the seller had the option to lower the price to appraised value (giving the seller the leverage to make the decision), but the 2011 version of the form gives the buyer to back out if an agreement can't be negotiated (giving the leverage to the buyer).
I'm not sure if the language in that addendum is uniform across all states or not, but if this is an FHA loan, you'll probably want to read the FHA addendum you signed (assuming you signed one).
Also, if it's an FHA loan that appraisal sticks with the house for 6 months. So unless you can find a cash or conventional buyer, you now have a cap on your sale price for the next 6 months.
But like everyone else says I agree you need to explain to them the idiotic appraisal worlsd we are living in. Not only do you wanto to inmediately take the $2,000 deduction but you want to throw something in there as a show of good faith, maybe a washer/dryer or the like.
You first need to start with their agent and explain to them why the appraisal is what it is and why it really does not matter.
A $2k drop in price is really nothing. Much better than having the house go back in the market and then possibly get hit with an even lower appraisal. Although if the next contract comes within the next 6 months and is also and FHA loan you might be able to use this appraisal.
i have not had problems with lower appraisals. one thing i that always do is send the appraiser the list of updates/repairs i've done to the home. this should give the appraiser a good idea on what you have done to the home.
Greg,
As others stated, read your purchase contract so you know what your rights are and where you stand.
Secondly, the advice of find another buyer and not waste your time may not be the best advice. While it is a common emotional reaction to a buyer like this, you must consider the costs of starting over again.
First and foremost, if you have the right via contract to reduce down to appraisal price, then you simple inform your buyer they have no more contingencies to back out and you will sue them for damages for not closing.
If you don't have that option, you will want to stay on the nice side and explain to them what I mentioned before regarding appraisals, that you will come down to that price, and that the costs for them (appraisal, inspection fees,time, etc) to move to another potential purchase may waste all the savings they think they are missing. Then, if all that does not work, you have to consier what the costs are for you to start over, how difficult it is in your market to find a buyer for this property, and weigh that against giving this buyer something else in addition to the $2k reduction.
Thank you for all of the replies. We're going to offer them a 2k reduction in the purchase price, pay for the inspection and appraisal and buy them a washer and dryer if they would like. If this doesn't do it then excuse my language, but screw them.
I would make sure to verify with their lender that it is okay for you to pay for their inspection. Especially if this is an FHA loan, there may be some restrictions on sellers paying for the buyer's inspection.
I think Will Barnard's advice is on the money. And if you let your emotions blow the deal and have to start over, the carry costs while you re-market, (ie taxes, insurance, water, sewer, electric, interest, heat if a cold climate) and wait to close, will exceed what you offer them to take the deal. And you are in this for profit, aren't you? As opposed to the satisfaction of making pretty houses available to uninformed buyers?
Trust me, I understand the emotion of wanting to move to another buyer. But while you do, the market could decline considerably, and you'll be in the winter selling season. Try to make the deal work, it will be worth it to close. Not to mention the opportunity costs of having your money and time tied up while other opportunities come and go.
Lots of investors in the northeast are taking much bigger hits on appraisals than 2K.
An appraisal within 5% of listed price, even post all the meltdown which began in my market in late 2006, early 2007, would be acceptable to buyer's loan underwriter, but if the underwriter appraisal says you are $2K overpriced, you must be willing to decrease purchase price, or the buyer must be willing to increase their down-payment by same amount. This is especially true with FHA-insured financing. It sucks, but it is what it is. The inspection and/or appraisal cost is not normally a factor, because everyone expects these costs to appear on the HUD-1 on the buyer's side, so don't give in to those expenses unless you believe it to be necessary to keep the deal from falling apart. Same comments about supplying a washer/dryer. Not necessary unless your buyer makes this a condition of the original offer, or an amend/extend. Good luck!!
I just spoke with the lender and they said that if I reduce the price by $2k then they can still make the loan happen. Does this mean if they back out after I reduce then I get to keep earnest? I just have a feeling this other realtor is trying to squeeze every penny out of us. Thank you.
Does this mean if they back out after I reduce then I get to keep earnest? I just have a feeling this other realtor is trying to squeeze every penny out of us. Thank you.
As a couple of us suggested earlier, you need to read the contract to determine what happens now. In some contracts, it would be us to the seller to determine if they want to drop the price, and if so, the buyer is obligated to go through with the purchase (or lose his EM).
But, these days, I'm often seeing FHA addenda that give the buyer the right to back out if the appraisal comes in low, regardless of whether the seller is willing to reduce the price.
And yes, the lender is going to be fine with you reducing the price; all he cares about is that enough money is on the table to cover the appraised value. But, the lender has nothing to do with what the contract says.
As Jason stated, read your contract to see which is the case. If you drop to appraised price and contract gives you that right to keep deal open, then yes, if they cancel, you keep their EMD and could sue for damages.
Ann made another great addition to my post in that she mentioned "opportunity costs". Not only would you have to consider the costs to hold longer for starting over with finding a new buyer, you would have to also include the time factor. In that time period from today to the time you close with another buyer, you could have used all yoru money to start on another deal, getting you closer to yet another paycheck. That is a cost many ofrget to factor.
So again, try and make this deal stick together somehow.
Thanks again everyone.. They are "moving" on because the appraisal came in lower than they thought the house was worth. They thought that they were getting a deal from what the email says. So, I guess the deal is over. Thanks for everyone who has helped.