Home Buying in Charlotte>Question Details

Mark Reynolds, Home Buyer in Blowing Rock, NC

Appraisal on new home came back 20% less than price in contract. Builder will not negotiate. If we walk, we lose a very large deposit.

Asked by Mark Reynolds, Blowing Rock, NC Tue Jul 5, 2011

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MArk was this a home you had the builder build specifically for you or was this a spec home built by a large regional or naitonal company? I've worked with many builders and have sold lots of new constrcution and havne't seen a contract that didn't include an appraisal contingency. If the home doesn't appraise the buyer may walk and recieve their earnest moeny deposit back or the builder could choose to reduce the price of the house accordingly or your lender could insist on anpther appraisal by challenging the first one.

Regzrdless don't spend any more time on the Internet seeking advice, get a hold of a lawyer today , have them review your contract and have them either get you out and your deposit returned or pressure the builder to reduce the price to a level you can live with.

By the way if you're not working with a Realtor this is an excellent example of why buyers should have their own Broker. IF you are working with one, why aren't they advising you?

I wish you good luck.
1 vote Thank Flag Link Wed Jul 13, 2011
I am sorry about your situation but the story you tell is not that uncommon. I'll give you an example: builder builds a $500,000 custom house in a neighborhood where the most expensive home is 450,000; the average price in the area is 385,000. At this point the agent should be screaming and yelling this house might not appraise! There are different examples of this throughout the country and when I work with clients I'm very up front with the in regard to the appraisal process, if they wish to customize the home with fixtures, not square footage to increase the price the home 20% above market value that I explain to them that the appraisal may not come in. Appraisers generally do not care about Italian marble in the house they only care about the comps in the area. I make it a point to let my clients know if you can buy it off the shelf at Lowe's then you're probably going to be finding your appraisal to have no issues, if you special order or customize fixtures, floor plan, or go beyond the budget on appliances and other items, your home will probably not appraise. Another question has your buyer’s agent attended all meetings that have been held with a builder or the builders representative? I will not talk to unrepresented buyers. So now the question is where you go from here, first read your contract carefully, then meet your buyer’s agent and discuss options such as reviewing the old appraisal for accuracy, obtaining a new appraisal, if the home is not complete ask the builder what can be done to cut costs. If this is a major problem for your financial situation you want to talk to the agents broker and seek even more advice, if you're not happy at this point were solution cannot be found and you feel you been wronged then consult an attorney. Good luck, Scott
1 vote Thank Flag Link Wed Jul 6, 2011
My question would be "What type of loan are you getting or are you paying cash?" For 80% terms your lender will lend 80 percent (LTV) of the appraised value or the purchase price, whichever is LESS. Any decent purchase contract would allow you out of the deal if the appraisal is less than purchase price.
Here are some possible options or items to consider:
1. Appeal the appraisal. The underwriter may allow the use of additional comparables from sales that are a little older or a bit farther from the subject than they normally use if necessary to support the value.
2. Increase your down payment if you are willing and able to do so.
3. Increase your loan amount. At even a penny over 90% puts your PMI in a higher bracket and could increase the monthly premium by 50% or more on conventional loans but you need to check with your loan officer because it may not even be available at all for your situtation. FHA financing would allow a smaller down payment if the other options don't work, but would add additional Mortgage Insurance Premium (MIP) to your loan amount and they may not approve your home in some cases.
4. Pay the difference - if you're paying cash and a loan is not involved and you really like the house and you think you can get your value back later down the road, then it may turn out to be a good investment. But that depends on the market value ath the time and not what you think it is worth.
5. Renegotiate. Even though the builder says they won't renegotiate, I'd go back again and tell them you are going to walk. Buyers can be hard to come by these days so the builder may not want to risk going back on the market again.
6. Last resort - you could go to court and try to get the difference back depending on the contract. As real estate professionals, we are prohibited from giving legal advice so it is in your best interest to seek the advice of an attorney and get legal help on this issue.
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1 vote Thank Flag Link Wed Jul 6, 2011

Who is the builder? Do you have a buyer's agent?

1 vote Thank Flag Link Wed Jul 6, 2011

First thing I would do is look at the contract you signed. Just about every contract (including a builders) has a provison for the appraisal. Read it over with your Realtor (i hope you have one and not the builder's Realtor).
Second, ask to see the appraisal. have your Realtor look it over and make sure the appraiser did not miss anything on the house you are building. Appraisaers are human and could have made a mistake..
Third, ask to see what the other houses in that neighborhood sold for comparably equipped.

The hard part for any of us is not knowing if you singed a contract on a builder form or the North Carolina Realtors form. it makes a difference in the advice we give you. Builders contracts are not designed to be friendly for the buyer and protect the builder.
Web Reference: http://www.davedicecco.com
1 vote Thank Flag Link Wed Jul 6, 2011
Hi Mark,

I guess there are several questions before this question can be answered: 1) is this a new home that was built to your specifications or was this an inventory home the builder had on hand already. 2) Did you sign the builder's own contract (probably) and what does it state as far as appraisal goes.? 3) Do you still want the home and who did the appraisal? 4) Did you have an agent who could help you sort all this out? If yes, they could maybe get a second appraisal in case the first one is not in line with comparative properties in the area. 5) When did you sign this contract and what did other homes in the neighborhood sell for?

Once you answer these questions it should become clearer what, if anything, is possible to be done. You should consult a real estate attorney to help you with understanding your options.

I hope this works out for you,

Best regards,

1 vote Thank Flag Link Tue Jul 5, 2011
What type of loan are you getting? Most lenders will not give you loan if the appraisal is so far below asking price. Therefor, you would not qualify under the financing contingency and should get your money back. If you are getting an FHA loan, this appraisal will be have to used for any other buyer that gets an FHA loan. It would be in the builders best interest to negotiate on the price or to give your money back. Was the contract written on a FAR contract or a builder contract?
1 vote Thank Flag Link Tue Jul 5, 2011
Apprasial contingency, it should be in the contract. Did you bring your own agent to represent you, help you write said contract or did you allow the builder to? FYI, and but that is something to keep in mind for next time.
0 votes Thank Flag Link Thu Jul 14, 2011
Most homebuilders in my area would not sign a financing addendum or an appraisal addendum on a custom build job with a lack of comps in the area, and when you also factor in the “pool system” for appraisal the odds are not in your favor. With this being said there is a very good chance the home would not appraise. In our area of the country most contracts for a custom build job use a cost plus system of usually 8-12% for the builder and real estate commissions are added to this to the tune of 5-7%. Most builders demand the homeowner use a construction perm loan and carry the note themselves. Everything is disclosed and spec’d out in the original contract; the homeowner and the bank approve the draws and are kept up to date on a weekly basis of budgeted items vs. actual cost of goods and labor. There is an appraisal done before the project even begins and conformation after the job is completed hence few loan type problems arise because of ongoing discloser throughout the process. The bank knows if the client has a 5000 allowance for appliances then went and spent 20000 the bank would stop the process and ask for more money from the buyer. The question asked by Mark does not give us enough details to answer with detail; I can only provide what is typical in our area. The quick run my many here to consult an attorney may not be the first thing to do. Read the contract, talk with all parties to determine the problem, then if nothing can be worked out and the client feels they have been wronged then go see the attorney. In our contract attorneys are not allowed it is stated that arbitration is the only recourse. I have a couple of new homes not appraise in the areas which I build they have been custom specs with items added which are not typical of the surrounding area. In all cases the “extras” that were added to the tune of 15k on a 220000 build job were the problem on a dollar for dollar basis. Some items do not add value to a home examples include: extra outlets, welder outlets, custom tier 1 granite, upgraded flooring & pad, extra concrete patios, safe rooms, custom paint, custom cabinets, custom locks and pulls, upgraded appliances are just a few.
0 votes Thank Flag Link Wed Jul 13, 2011
This doesn't sound right. I sold new homes for 10 years. Are you working with a realtor? If not read your contract again. If the appraisal is less than what you purchased the home for the builder should match the appraisal. If not you should be able to walk away by using your financing contigency. You can't get a loan for the purchase price if the appraisal came back to low! The bank will not loan you money for more than the home is worth. You should get 100% of your earnest money back! Good Luck!
0 votes Thank Flag Link Tue Jul 12, 2011
I would contact an attorney to see what the law is in your state. In my state, Texas, the home must appraise or the buyer may terminate.

Jack Gillis, M.B.A., J.D.
Nathan Grace Real Estate
5619 Dyer Street | Suite 100
Dallas, TX 75206
Cell: 214.718.4910
0 votes Thank Flag Link Tue Jul 12, 2011
Did the buyer use a real estate attorney to review the builder's contract? If not, hire one ASAP!
0 votes Thank Flag Link Tue Jul 12, 2011
An appraisal is an opinion of value done by one individual. A second appraisal needs to be done by a different appraiser. Appraisal is like any other profession in society, they can have a bad day or just one indivual could do bad job in general. Most lenders choose appraisers in rotating pool however, so the good news is that second opinion of value will come from a totally unique source. If that second opinion supports the first opinion, then you have a very legimitate legal cause to get your deposit money back and opt out or renegotiate the purchase price. You should consult an attorney if the sellers will not meet either of those terms. Good Luck
0 votes Thank Flag Link Sun Jul 10, 2011
Some very good suggestions below. Sounds like there may not be any clause regarding your home purchase being subject to the appraisal coming in at or above sales price. Perhaps you should consult that attorney and go from there.
Web Reference: http://wwwsusanzongker.com
0 votes Thank Flag Link Wed Jul 6, 2011
Mark Reynolds,
There are many good questions being asked. However, one question remains: "Do you still want and like the house?" And " What do you believe the house is worth?" An appraisal is subjective to some extent. Do you have a copy of the appraisal in hand? One needs to see what comparable sales were used and how those sales were evaluated. The next step would be to speak with the lender and appraiser to get their thoughts. After that, a 2nd appraiser should be consulted. Once two appraisals are completed, then you have two professional opinions on value. It would be better to resolve this problem out of court if possible. In all probability, you are going to need a real estate attorney to review your contract and advise you of your options. If you have a realtor, then that realtor may have an attorney suggestion for you. I would be happy to provide attorney references to you.
0 votes Thank Flag Link Wed Jul 6, 2011
If you are getting an FHA or VA loan there is an FHA adendum that is signed by the seller that state that the purchaser shal not forfiet any deposit and not be obligated to purchase the property if it does not appraise at or above the purchase price. If you are getting a conventional loan there is also an appraisal contengency in the contract. If there is no appraisal contengency in your contract you either had a horrible agent or no agent.
0 votes Thank Flag Link Tue Jul 5, 2011
I am sorry to hear about the issue at hand - but did your purchase contract not have an "appraisal contingency" in it? Very odd for a purchase contract not to contain one - however anything is possible.

What type of financing are you using? Is it FHA or VA?
0 votes Thank Flag Link Tue Jul 5, 2011
Why would you lose your deposit? Your agent should have had an appraisal contingency. Check your contract and if you don't have one, sue your agent, if you don't have your own buyer's agent and used the builder's...
0 votes Thank Flag Link Tue Jul 5, 2011
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