1st time homebuyer - If we get an appraisal that is greatly lower than our contract price, what should we do?

Asked by Matt, Finn Sat Aug 11, 2007

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24
George Anton…, Agent, Madison, CT
Sun Aug 12, 2007
Hi Matt,

The purchase of a home for most people is the largest investment they will ever make. You are doing the right thing as a buyer. You don’t want to purchase the home and then feel that you overpaid or were taken advantage of from day one.

If you are having concerns your attorney should address them. That is why you hired one. It is their responsibility. Since most attorneys live in contracts, he/she should be able to easily determine if you can get out of the contract with your deposit if there is a loan to value issue.

With respect to the appraisal, it’s not uncommon to get a second opinion. If you do have an agent, the agent can speak with the appraiser to determine how the number was derived. At least this will give you a sense of the value.

Good Luck,


George Antonopoulos
Realtor
Coldwell Banker Residential Brokerage
Madison, CT 06443
800.759.6936
4 votes
Deborah Madey, Agent, Brick, NJ
Sun Aug 12, 2007
Hi Matt,

I work in NJ, which is an “attorney” state and I have dealt with a few contracts that have failed to meet appraisals. My experience with this has been a few years back and during the days of a sellers market. Absent a specific clause about appraisal, the mortgage contingency clause might give an out for a buyer. Since I am not an attorney, and I do not have a copy of your specific contract, this is not legal advice. I will relay what I have seen and experienced.

Your question is really two part. Legally, what can you do? Practically and financially, what is the best decision? If your contract only has a mortgage clause, were any terms such as rate or type of loan defined? Were you pre-qualified? Did the loan officer discuss with you any loan programs and provide a pre qual based upon that criteria? Based upon your earnest money and down payment, does the contract reflect that your offer and purchase were predicated upon an LTV of 80/20? If you failed to meet the loan you intended, the mortgage contingency may allow you the out. If the intended 80/20 loan now was not possible, the alternative loan and interest rate at a different LTV may place the payment beyond the reach or willingness of the purchaser. This depends upon the terms of your contract, and, again I am not an attorney. I have seen of contracts terminated based upon the above.

You mentioned that your loan does not require you to put down 20%. I interpreted that to mean that your creditworthiness allows you to qualify for a loan with less than 20% down. What alternative loan programs for which you might qualify is relevant only as it applies to the terms outlined in this purchase contract. Does your contract reflect purchase terms of you placing 20% down and financing 80%? While you might be creditworthy of alternatives, the contract, as written and accepted may fail to pass “go.”

During a sellers market of multiple offers and paying over list price, a common seller request was to have a clause written in to a contract stating that a buyer agreed to the purchase even if the property failed to meet appraisal. It was specifically written in that failure to secure the intended type of loan based on LTV did not grant the buyer rights to walk. The mortgage contingency remained in the contract to protect the buyer in the event of other circumstances that might prevent the buyer from obtaining the loan. The “does not need to appraise up” clause was added, even though there was no other term of the contract that ever addressed appraisal amount. The added clause was to define the mortgage contingency waiver.

Practically speaking, do you still want to purchase this property? Do you have an agent that you can discuss this with? Even in NJ, where we have an abundance of attorneys who specialize in real estate law, these attorneys do not walk the properties, know the competition and are not able to discuss alternatives the way a full time Realtor can. If you have an agent representing you, what is his/her advice? If you haven’t a Realtor, take a look at the alternative offerings.

You also mentioned that your attorney advised you to stop second guessing yourself. Perhaps you are nervous and have analyzed other “what-ifs” and your attorney simply made a general statement to you that becoming a homeowner is a wonderful thing. If, indeed, there are any problems with appraisal, your attorney will dive further into discussion with you at that time. It’s common for first time home buyers to become a bit nervous and ask the “What if’s” So, I will close with.....”What if the appraisal comes in higher that the purchase contract?” It might.

Best of luck to you.
Web Reference:  http://PeninsulaFirst.com
3 votes
Mitchell Hall, Agent, New York, NY
Sat Aug 11, 2007
Matt, If you have a financing contingency and it doesn't appraise most likely the bank will turn you down for that loan. If they are willing to finance 80% of a $200,000 house they will loan you $160,000. If the house appraises at $160,000 they will most likely only offer you $128,000 (80% of the value) Your choices most likely would be
1. pay the $32,000 difference
2. try to renegotiate the price
3.walk (you should be able to get you deposit back)
check with your attorney because I am not an attorney and don't know all the terms. Ruth is probably correct that you are just second guessing yourself and the appraisal will probably be just fine. Good Luck
2 votes
Pam Winterba…, Agent, Danville, VA
Sat Aug 11, 2007
Matt....It would be time to renegotiate with the seller. I would suspect there is an appraisal contingency clause in the purchase agreement. If so, the seller does not have to sell for less and the buyer does not have to pay more that the appraisal price. Ask your Realtor to go back the the seller agent & sellers to renegotiate the price. Hope this helps.
2 votes
The Hagley G…, Agent, Pleasanton, CA
Sun Aug 12, 2007
One idea would be to ask for a second appraisal. If both come in around the same and you really want the home, go back to the seller and try to re-negotiate.
Web Reference:  http://www.cindihagley.com
1 vote
Pam Winterba…, Agent, Danville, VA
Sat Aug 11, 2007
Matt....My guess is your financing contingency is also based upon the appraisal coming in at contract price. If you are doing 20% down and it doesn't come in your financing contingency kick in. Go back and check with your attorney. By the way is there a Realtor involved in this?
Web Reference:  http://pamwinterbauer.com
1 vote
Ruthless, , 60558
Sat Aug 11, 2007
Matt:
I agree with your attorney - stop second guessing yourself. Are you a betting person? I'll bet you $10 that your appraisal comes back EXACTLY (+/- for rounding) for your sales price! I've never heard of an appraisal clause but your mortgage contingency serves as almost the same thing. Trust me, if the appraisal comes back for only $195,000, if you ask the bank they will turn down the loan. Now, the catch is, if the bank turns you down, the seller can loan you the money instead of the bank to keep you on the hook for the $200,000.

I just heard a Mark Twain comment the other day, "There are 3 kinds of lies, 1) lies 2) BIG lies and 3) statistics. An appraisal is manipulating statistics.

Good luck,
Ruth
Web Reference:  http://www.Oak-Park-IL.com
1 vote
Jim Walker, Agent, Carmichael, CA
Sat Aug 11, 2007
Matt,
15 years ago I was a loan officer for a young couple. Their contract price was $172,000 the appraisal came in at $160,000. After howls of indignation, insults about my appraisers and my professionalim from both the listing agent and the sub-agent, , the sellers and buyers agreed to meet halfway. My clients paid 6K over asking price and were thrilled to pieces, because they saved that much too!

On another deal, the difference was only $2,000; the buyer ponied up the whole difference.

My thought is, if the difference is only 2 to 3% you can pony up the difference and still feel like you are getting an ok deal if the house is exactly what and where you want. If the difference is 5-9%, You could ask the seller to at least meet you half way if that is the only property in the world you want. - and hey an appraisal is only a professional best guess estimate of value.

I gather from the thread that your contract is for $200K and the appraisal is $160K. That is a 25% price premium to value! When there is that kind of percentage spread something is terribly wrong, and someone is in danger of being taken advantage of. It could be that your appraiser is an idiot. It could be the attorney is an idiot. Or maybe we are just getting all worked up over some remote possibility.

As far as getting turned down by the bank, you may or may not have options there. Some contingencies will state an interest rate such as "at a rate not to exceed 6.5% fixed" If you have a "not to exceed" clause you may be able to cancel on the contingency because the 100% LTV loan is at a higher rate than the 80% LTV loan.

Finally, --DISCLAIMER I am NOT a Lawyer! -- there are legal concepts such as suitability, intent of the parties, unequal postions of the parties. ---

If there is a 25% disparity between the value and the contract price, there may be legal means for voiding the contract in common or statutory law even if they are not spelled out in the contract.

Finally, you hint that the appraisal may come in for $160K. Why do you think it will come in so low? Do you base that on a conversation with someone. Did someone conjecture that it could be anywhere from 160 to 200 and you only heard the 160 end? Until you have the written appraisal, all we have been doing here is conjecturing . Please update us when the written appraisal comes in.
1 vote
Robert Kroon, , Phoenix, AZ
Sat Aug 11, 2007
I agree with Pam. the standard contract here in Arizona has a contingent upon the appraisal being at least equal to the contract price. But yours does not.....so what to do....I agree with Pam go back and renegotiate.
Your attorney might be quite good at law but he definitely is not a good realtor and in this case is not representing you well. "Stop second guessing......" Ugh. if he wrote the contract, well any good realtor knows the contract should be contingent upon appraisal...He should stick to practicing law.
1 vote
Carrie Crowe…, Agent, Southaven, MS
Sat Aug 11, 2007
Matt,
The market is flexible and does move up and down. If the property does not appraise, your mortgage company will not grant the loan and you will not quailify under those conditions. That is the spot of good news.
Web Reference:  http://carriecrowell.com
1 vote
Pam Winterba…, Agent, Danville, VA
Sat Aug 11, 2007
Matt....Well I guess I have more questions.

If you are using an attorney I am guessing your may be buying on the East coast? Your post does not say how much the appraisal is off ? If you are putting 20% down it would be of the appraised price so you would have to make up the difference in cash (from sales price to appraisal price). Do you have the extra cash?

Did the attorney write the offer on your behalf? If so is there another protection clause in it besides the loan?
Web Reference:  http://pamwinterbauer.com
1 vote
Melissa Manc…, Agent, Plainville, MA
Tue Aug 14, 2007
Hi Matt: there should be some protective clause about this circumstance, stating that if it occurs, you are entitled to your deposit back and the agreement becomes null and void. If the seller is willing to reduce their price to the appraised value, than you may want to consider sticking with it. Consult your agent or attorney to be sure though.
0 votes
Matt, Home Buyer, Finn
Tue Aug 14, 2007
Thanks everyone. I will keep you posted. I just wish it was like Arizona where they have an appraisal clause mandated on all real estate contracts.
Best,
Matt
0 votes
Ruthless, , 60558
Mon Aug 13, 2007
I liked Deborah's question of whether you still want the home. Your response sounded like buyer's remorse, NOT REGRET. I think that is why Deborah said, "What if it appraises higher?"

The difference between buyers remorse and regret would be if you bought a new car or computer on clearance because the new models were coming out soon. You got a great deal (you think) because it was marked down by 30%. The new model comes out and it has some improvements and the new model price is the same as what you paid. That would be regret. But if the new model came out with some improvements that you would like but at a price higher than the old model's original price, that would be remorse. You don't really know if you would have paid the higher price or not because you have already spent the money. But you knew the new model was coming out and you chose to buy because of the opportunity to get a great buy.

If someone came along and put a higher back-up offer on the house you are buying, would you let the house go to them? The seller surely would let you out of the contract. The banking industry is EXTREMELY conservative these days. If prices ARE TRULY going down that fast, they will appraise it low to protect themselves. You should have your agent pull up "under contract" listings to see how things look.

So, if the appraisal does come out lower, you should buy it at the appraised price if you still want the home. Let us know what it appraises for.
Ruth
Web Reference:  http://www.oak-park-il.com
0 votes
Paul Slaybau…, Agent, Scottsdale, AZ
Sun Aug 12, 2007
Hi Matt,

The agents here have already covered the topic well, but allow me to simplify. Even if your contract does not have a specific appraisal contingency, the lender will not provide you with the loan specified in the purchase contract. You may still obtain financing, but for a lesser amount. The financing contingency in your contract will most likely apply because you cannot obtain the loan that you specified. Even without seeing your contract, I think it is highly likely that you are entitled to walk away with your earnest money. As such, this is great leverage to sit down with the seller and negotiate a new purchase price that is based on the appraised value.
0 votes
Matthew J Bl…, , 33410
Sun Aug 12, 2007
In this market place right now this is happening a lot. This is why I always recommend my clients to use a FULL-TIME Professional Realtor. Your Realtor should help you with this in either changing your contract price or getting your Ernest money back.
0 votes
Matt, Home Buyer, Finn
Sun Aug 12, 2007
Debra,
Thank you so much for your very informative response. I probably am just second guessing myself. It's just that all the negative real estate news has gotten to me. It's a bit nerve-wracking!
Kind regards,
Matt
0 votes
Matt, Home Buyer, Finn
Sun Aug 12, 2007
Thank you all for your thoughtful, detailed replies. My real feeling is that, knowing my concerns, the attorney should have just amended the contract to include the clause. What's concerning me is that recent comps have been showing lower sales around that amount.
My loan doesn't require me to put down 20%. If it's correct, I feel better knowing that if an appraisal comes in at $160,000, then the bank would reject it because of the LTV. What I don't want is the bank to okay it at that point. It's the rejection letter that's required as per my contract to activate the mortgage contingency clause.
Don't you all find it confusing given that the market has kind of made a drop and may be going further. It's hard to feel secure in what one is paying.
0 votes
Carrie Crowe…, Agent, Southaven, MS
Sat Aug 11, 2007
Matt
Review your contract closer. Our contract has an automatice appraisal contingency written in. I believe most do. Read every word or have an attorney read it for you! Good Luck!
0 votes
Matt, Home Buyer, Finn
Sat Aug 11, 2007
Thanks, Roberta. The contract has a loan contingency which is based on getting turned down for a loan.
I would need the bank to reject the loan in order for that contingency clause to kick in. My concern is would they give me the loan if the appraisal came in just at the amount I'm requesting? I'd prefer they not give me the loan unless the home appraises for the purchase price I'm paying. What do you think?
0 votes
Roberta Murp…, Agent, Carlsbad, CA
Sat Aug 11, 2007
Matt: Check with your attorney to see if there is an appraisal and/or loan contingency. If so, you may have an automatic out--or grounds for renegotiation. If your stated loan numbers don't calculate with the lower appraisal, you may be able to negotiate with the seller for a price that will work.
0 votes
Matt, Home Buyer, Finn
Sat Aug 11, 2007
Thanks, Robert. Provided we don't have the appraisal clause, can we just back out of the contract completely? Would we lose our earnest money?
0 votes
Matt, Home Buyer, Finn
Sat Aug 11, 2007
Pam,
Yes we're on the East Coast. The property is $200,000 and we're putting down $40,000.
If the appraisal comes in at $160,000, we'll still get the mortgage, but wouldn't we be be greatly overpaying?
Also, if there's no appraisal clause, is there any other way we could renegotiate or back out of the deal?
0 votes
Matt, Home Buyer, Finn
Sat Aug 11, 2007
Thanks so much, Pam. Our purchase contract does not have an "appraisal clause" although it does have a mortgage contingency clause. We're going to put down 20%, so I doubt we'll be rejected for a mortgage but, the property could still come in considerably below what we're paying. When I asked our attorney, he said we should stop second guessing ourselves and that the market moves up and down and so do home values.
What do you think?
0 votes
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