Many times we are asked durning our initial consultation, what happens when if a home doesn’t appraise for the purchase price? This question is more relevant that ever as you might of already guessed… we are seeing this come up more and more often in this challenging market.
As a buyer in today’s market, you typically have a few options:
* Options number 1 is that you have the right to cancel the transaction. The C.A.R. Purchase Agreement has an Appraisal Contingency which states something to the like of… the contract is contingent upon a written appraisal from a licensed professional with the home appraising at no less than the specified purchase price. As long as you have done this within your default time frames, and you haven’t removed this or your loan contingency in writing, you “should” be safe to cancel the transaction with no additional expense to you. (There are complications as to when you may not be entitled to a refund of your deposit; however that is a completely separate topic. Always check with your Real Estate Professional.)
~ Now if you have been a buyer in this market for any given time, you probably know how difficult it is or was to find the right home, so please consider canceling your transaction and this option carefully as it will mean starting the home buying process all over again. You do remember what that was like, don’t you?
* Option number 2 is that you have the option to re~negotiate the sales price with the seller.
~ If this is an equity seller, there are a lot of factors that may go into consideration here… how long has the home been on the market, was it listed high to begin with, have the seller’s relocated, why are they selling, etc, etc. Each of these provide a unique and personal style of re~negotiation; however you have the best chance of re~negotiating with a seller that has an equity position.
~ If you are working with a bank owned property, chances are you were in a multiple offer situation which caused you to increase your offer in order to secure the property. If this is the case, you may have a difficult time as they can simply go right back on the market and get another buyer at the same price, and move on…
~If you are in a short sale, chances are that prices were negotiated 30-60 or even 90+ days ago, and the market has now changed… You find yourself in a situation where the value is simply no longer there, the property may be deferred since that time, and the market no longer supports those prices. You will have to let the Listing Agent know right away, and the listing agent will have to go back to the negotiator, who will have to go back to the investor in order to consider the reduction. With that said, it could further delay the process, and experience shows that once they have determined a value on their end, it’s very difficult to get a reduction. Most of the time, they simply stand firm and force you as the consumer to revert to option 1 or possible consider the next option…
* Option number 3 is that you bring in the difference to close the transaction… In most cases this is becoming more and more difficult as buyer’s in this market typically run financially lean.
Let me provide you with a quick example… the home is under contract at $400,000, and the buyer is purchasing the home with an FHA loan with 3.5% down. The loan amount would be: $386,000. The appraisal comes back to the lender and the value comes back at $390,000. The buyer can still obtain the same financing based on the the lower price which would be the $390,000. The new loan amount would be: $ 376350. This would require the buyer to come in with an additional $9650.00 on top of their down payment and closing costs in order to close the transaction. If you have the funds, this may be worthy of consideration; however if you don’t have the funds… your only option is to go to option number 2… or then go to option number 1.
In past markets when we were experiencing values increasing on a daily basis, there was a 4th option. Option number 4 would be very common for the buyer to remove their appraisal contingency upfront, and if need be, just get another appraisal. If one didn’t come in at value, another just might.
In this market, in most cases, that is not an option. If you as a buyer have an FHA loan, the property is assigned a case number and the appraisal stays on file with that property. If it doesn’t come in at value… you or any other FHA buyer on that property would have to wait 90 – 180 days to get another appraisal!
Bottom line, when you are working in today’s constantly changing market, you need to have a consultant like me, that is familiar with how to determine value, what adjustments can and can’t be made, and how we can help you work with the loan officer and the seller in order to make sure that you have a successful transaction. Remember, there are always options, you just need to know them up front, and make good decisions because you do want to make good decisions, don’t you?
Hope you find this helpful. Please share this with your family, friends and those you care about, and Happy house hunting.