Financing in Bucktown>Question Details

George, Home Buyer in Bucktown, Chicago, IL

Do you just walk away when a place you want doesn't appraise for the price the seller has it listed at?

Asked by George, Bucktown, Chicago, IL Sat Jun 21, 2008

This new construction one-bed, one-bath I'm really interested in did not appraise today for what seller was asking. Not even close. During early negotiations, Seller offered to get me to close by offering to put in upgrades for me (some of which seller later pulled back from the table). The lender views property as being valued at about $24k under list, based on comps, and that's with taken into consideration the parking spot I'm buying in the building. I'm a qualified buyer putting 25% down on the loan and am otherwise cleared to close. Do I walk? Ask the seller to lower price? Let seller keep list price if I come up with extra cash to close, but have seller give me the near-equivalent of $24k upgrades to trade with me for the $24k in cash I'd find to close the deal? Or is this just a bad situation?

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George,

Your answer likely rests with your attorney, your contract, and the developer's attorney. Most contracts include language alluding to the need for the property to "appraise out." Not looking at the contract you signed or additional language inserted by your attorney, I don't know if that language exists so I can't comment on what direction you have available to you. Another typical clause in a developer's contract unless removal is agreed upon between parties is the developer's ability to get a mortgage for you if you are not able.

One thing I wish to submit having been ill-served by an appraiser or two is that it is plausible that the property was not accurately appraised. This being the case it is likely that the developer will have another appraisal ordered. This was the course my buying client and I took a year ago Memorial Day when a Bucktown one bed sold but the appraisal came back well under what the buyer agreed to pay. The buyer tried to back out of the contract. Our stand was that if the appraisal was accurate, we would view the buyer's actions as reasonable. However, an appraisal that we ordered came back favorable to the sales price. So we were determined to keep the buyer in the contract. At this point the issue became more legal than anything else. But my client was not willing to release the earnest money.

At the end of the day an agreement was reached between the parties and the buyer remained in the deal. I wouldn't be surprised if the developer didn't have another appraisal conducted. I would imagine that the true value of the condo is somewhere between the numbers generated by each .

By the way, were you represented by a real estate professional? If so, did this individual run comps to help you determine how much to pay? If so, aren't you surprised by the variance between what you agreed to pay and the appraised value? Again, perhaps the agreed upon price varies from "true" value, but I find it difficult to fathom that you were so severely off the mark with respect to the contract you originally negotiated.

Tom McCarey
The Real Estate Lounge Chicago
2 votes Thank Flag Link Sat Jun 21, 2008
I agree with Stacy. You're in a good position to negotiate. Certainly don't walk away before you try getting the price down by at least $24,000.

Understand that $24,000 in upgrades won't add anywhere near $24,000 in value to your unit. Nor will it even cost the developer $24,000 to put the upgrades in. I don't know what upgrades are involved, but it might be only $4,000-$6,000 out of pocket for the developer.

And even though you've got the cash to buy the place, you'd essentially be overpaying by $24,000. That'd be an unwise decision.

Go in there an negotiate tough. Start off asking for a $24,000 price reduction and $15,000 in upgrades. You can trade a bit of the price reduction off for hefty upgrades, or you can trade most of those upgrades off for a $24,000 reduction.

Your argument is that you're a qualified buyer...and that's worth a fortune in today's market. But you're not going to overpay, especially when the market may be declining further. And if the developer's first response doesn't move significantly in your direction--more than halfway--then walk.

Hope that helps.
3 votes Thank Flag Link Sat Jun 21, 2008
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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So far the answers to this question are rite on the money but the agent only talk in terms of getting his higher commission he wouldnt pay that he wants a good deal too. I agree with the answer the builder or rehabber will never pay what they "jack up the price" and ask for. If the upgrades are $25,000 if only costs the builder/rehabber maybe $5000 if that much if he catches a sale on the materials or a wholesale house that sells the stuff all day long" cheaper then you verrrry well paid too much. The labor same difference you got workers for $10 an hour the builder/rehabber makes triple when him and the agent he hires to sell it gets through with pricing. I Would Walk Easy . Buy a foreclosure or tax sale property you can get a good deal and sometimes with all the amenities, upgrades and "granite counters"
1 vote Thank Flag Link Sun Jun 22, 2008
This is really not a matter of negotiation. The seller (builder?) would be well advised to just reduce the price to the amount of the appraisal, and likely knows it.

If not, what you do is up to you. You could pay the difference in cash, and reduce your down payment to 20% if you need to. Whether or not the more involved scenario regarding getting the upgrades is advisable at this point is something you should discuss with an attorney. It would likely involve completely rewriting the contract. Then again, it's possible that doing this might bring the appraisal up to the original price, and cost you no extra.

Personally, I would walk if the seller does not accept the appraised price. Like improvements, the value of upgrades does not add appreciably to the value of a property at resale.
1 vote Thank Flag Link Sat Jun 21, 2008
If you really like this home I would ask the seller to lower the price to the appraised value. If they seller can't or won't I would advise you to find another property. I hope it works out the way you want it to!
Web Reference: http://www.markroncone.com
1 vote Thank Flag Link Sat Jun 21, 2008
George,
Does this happen to be unit 503@1927?
0 votes Thank Flag Link Sun Jun 22, 2008
Greg, according to the description on your blog, this condo is non-warrantable. Not sure I'm catching your drift, though. Is your point that, while I may be lucky enough to find financing, many others will not because Freddie Mac and Fannie Mae will not fund a non-warrantable? And if if I'm one of the few, then the seller should make an attempt to keep me in the game?

I like this drift. But is this what you're implying?
0 votes Thank Flag Link Sun Jun 22, 2008
George:

I wish you well in your situation. Do you have a mortgage commitment. With only 25% sold, here is my blog on non-warrantables for your consideration. You may want to ask your lender whether this issue has been addressed.
http://localism.com/article/560254/What-is-a-Non-Warrantable-Condo

http://localism.com/article/560254/What-is-a-Non-Warrantable-Condo
0 votes Thank Flag Link Sun Jun 22, 2008
I don't know if the builder has had this problem yet or not. It's a small bldg, only 25% sold, including one in pre-construction. Of those sold, only one other is a 1-bed/1-bath like mine. There's little data to go on for any comparison, let alone apples-to-apples. I'll know more in a couple of days when agents, lawyers, lenders, and appraisers start trading phone calls. It is a strange situation, as many of you have confirmed. I'm wishful, but not terribly hopeful that this will resolve happily. Pity.
0 votes Thank Flag Link Sat Jun 21, 2008
George,

Sounds like you have a handle on it and are happy. Thats great!
Web Reference: http://www.markroncone.com
0 votes Thank Flag Link Sat Jun 21, 2008
As this is new construction, has the builder encountered this same problem with other units? Is this the 1st closing for this project? Is this a non-warrantable condo?
0 votes Thank Flag Link Sat Jun 21, 2008
These are great answers--very helpful to me to get outside opinions. There was, I am told by my lender a second appraisal done (probably just comps?) that came in slightly below the first. More than coincidentally, the dollar value that the appraisal came in at, below the list price, is about what seller was charging for parking. I clarified this with my lender who confirmed that the appraisal included parking. That is likely where seller will balk at the appraisal(s). Maybe there is a mixup, or maybe this is a tactic to command a $25k premium on parking that is, based on comps, already baked into the price.
0 votes Thank Flag Link Sat Jun 21, 2008
You should consult the contract and your attorney to see what you can do if the property does not appraise to the purchase price.
Web Reference: http://www.realtybob.com
0 votes Thank Flag Link Sat Jun 21, 2008
You are in a position to renegotiate the price and that is what I would do if you like the place... If they will not do it you can walk or come up with the additional cash to support the mortgage that you are getting.
Web Reference: http://www.condochicago.com
0 votes Thank Flag Link Sat Jun 21, 2008
I would be very careful. If your is under list, then most of the others will be as well. Also, check on the builder. Many of them are not stable these days.
I am a big fan of buying a new home when it is 1-3 years old. Let the original owner get the headaches.
If you are buying the least expensive unit in the building and can get the reduction, perhaps. I wouldn't ask for upgrades since $24K in upgrades may only be worth $15K on resale.
0 votes Thank Flag Link Sat Jun 21, 2008
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