Appraisal came in low on a 203k loan...now what?

Question

Hello BP members,

So I am about to close on my 203k construction loan; however, my appraisal came in lower than what I needed it to be at.

Details:

Purchase price: $105k

Rehab + contingency: $100k

Loan amount: $205k

Down payment amount: $13k

Appraisal: $185k

Unfortunately, now I have been given a couple options from the lender which are:

1. Either pay the difference (which I don't necessarily have all of it, so that's not really an option).

2. Renegotiate the amount of the loan (which may not be accepted, since it was a bank foreclosure).

3. Or knock off some of the things on my rehab ( which may not be the best option because then the appraisal could come in lower, because the appraisal was based off of the rehab I was going to do).

Is there any creative financing options that I could possibly use to get this deal to close?

Any input would be appreciated.

Paul Welden · Answer

@Colby D Hollins

You could always try to renegotiate with the seller.

FHA 203k Loans are allowed to go to 110% of the appraised value and still close. Check with your lender for details and reference HUD SFH 4000.1.

Colby D Hollins · Answer

@Paul Welden I am in renegotiations now and I took a screenshot of this policy and I will definitely be asking my.lender about it. Thank you

Rick Albert · Answer

I actually used that to my advantage on my 203(k) loan negotiation as my construction costs were higher than what I could borrow.  I used it as a tool to lower the price with the Seller under the loan contingency clause.  Banks are very hard to negotiate with but if you can provide a full contingency release pending the price reduction, you might have a shot.

Deanna O. · Answer

I always try to be on the side of the angels, but a deal that can pass the Doom-and-Gloom test is usually much more solid than one that depends on unicorns and candy sprinkles aligning with the planets. Creative and optimistic folk with great attitudes are attracted to RE, which is both our strength and our weakness. I'm over 50, but I still pass everything through the "Court of Mom". Good news is, if a deal can pass THAT critical review, it's solid LOL.

Colby D Hollins · Answer

@Deanna Opgenort yes I still would want this property. I was able to get it at the ground floor and the area is in massive development. I work with a project management company and they are doing a massive development close to this property.  Not only does it cash flow after all of my rehabs will be done. I am anticipating within the next 1 to 3 years I could see some great appreciation. The area I am in southwest florida (fort myers) is the top growing place in florida and top 10 in the country. Im pretty sure I will be solid in the long run and since i will still get pure cashflow I'm going to go for it. Thanks for playing devils advocate though always good to reevaluate my decision.

Colby D Hollins · Answer

@Steve Schulman it definitely does I will be shopping around for some lowered material cost. Thank you. Yes, the bank I think is going to lower there price to the original listed but I still waiting so fingers crossed.

Deanna O. · Answer

If the market upswing suddenly stopped, and the value of THIS property went down 10%, would you still want in? That scenario is what the banks seem to be preparing for. 2008 is recent history. The folks planted behind those loan officer desks remember it, and the underwriters are all a bit jittery.

Steve Schulman · Answer

@Colby D Hollins Always start with the seller then go from there. Your realtor should be savvy enough to negotiate the sellers down with some logic. Did you offer asking price? Clearly purchase price is too high, the HUD consultant gave contractor labor & material market quotes. Based on SOW and ARV appraisal, you should be able to make a case that this is the most they will get. Nobody is going to pay more than you.

It’s not in their best interest to put it back on the market. It’s seems the only buyers are 203k one like yourself or a experienced cash investors. Those guys will be smart enough to know exactly how much it’s going to cost (use L&M market quotes as back up) to rehab up to par. Even if these other investors have in-house construction teams they still need their margins for F&F or desired profit. They will come in below your current number 100% because of this and since they are cash (and all cash buyers think they are entitled to this aka 70% rule). Why would the sellers want to put the home back on the market to MAYBE get another offer in a reasonable time, below your current contract price (or your re-negotiated price)? You will give them best offer and terms, today.

If they balk, see if they will meet your somewhere in the middle then try adjusting material costs, slightly. It can help… Shop cabinets suppliers for 20-30% discounts, call wholesalers for LVP flooring, countertops, appliances, etc. Maybe even consider subs for certain work. Hope this helps and good luck!

Bill B. · Answer

NP. GL.

Colby D Hollins · Answer

@Bill Brandt I was actively searching for property and I was able to get an offer in on this property the minute it hit the market. Its in a C class neighborhood which may be the reason as to why it was available. All of those are good options. I bank with chase so I highly doubt they will give a personal loan for this but it doesn't hurt to ask. I don't have that much family that would have the capital for this but it is definitely worth asking...instead of just asking to borrow the money. Thanks for the input I appreciate it.

Appraisal came in low on a 203k loan...now what?

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