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Low appraisal? Here are home sale options

June 29th, 2009, 12:00 pm · 12 Comments · posted by Marilyn Kalfus, real estate reporter

What if the appraisal for the home you want to purchase is less than expected? Dennis C. Smith of Stratis Financial in Huntington Beach tackles that question in his blog this week. Excerpts:

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Q:  What are my options as a buyer if the appraisal for the home I am buying comes in low?

 
A:  Between the large percentage of homes on the market that are either short-pays or foreclosures, soft prices in most areas still and the HVCC process forcing poor appraisers into the market place, appraised value is more of an issue than it was a few years ago.  So what are the options available when an appraisal comes in low, or if an underwriter cuts the value of an appraisal, for a purchase transaction in escrow?
  
For our discussion I will use a sales price of $500,000 and an appraisal of $487,500 — a 2.5% reduction in value from the sales price.
 
Lenders use for value the lesser of sales price or appraised value.  Therefore on this transaction if the borrower was putting 10% down, his 90% loan would be $450,000 of the sales price; now his $450,000 loan is a 92.3% loan to value transaction which changes the rate, the mortgage insurance and in many instances he may not be able to secure financing. 
 
Here are the Options, not in order of preference for either party:
 
Option 1:  The seller lowers the price of the home to the appraised value and the transaction continues with a 90% loan based on the $487,500 sales price ($438,750 loan amount).  Good for the buyer, bad for the seller. 
 
Option 2: The buyer makes up the difference between the sale price and the appraised price in cash to reach the new 90% loan to value limit of $438,750; a total of $61,250 down payment; an increase of $11,250 in cash to close.  Good for the seller, bad for the buyer.


 
Option 3: The buyer and seller agree to split the difference and agree to a sales price of $493,750; the seller gets less money and the buyer comes in with a down payment of $55,000 to meet the lenders loan limit of $438,750.  Not as bad for the buyer, not as bad for the seller.
 
Option 4: Both parties agree to have the borrower change lenders and order a new appraisal. This is a very risky option depending on several factors, including the borrower’s rate lock and most importantly the risk that the next appraisal may be even lower than the first.  Remember using the HVCC appraisal process has been a roll of the dice on who will appraise properties.
 
Option 5: An agreement cannot be reached and the transaction is cancelled.  The buyer moves on to find another property and the seller puts the home back on the market hoping to get another buyer at $500,000 or greater and hoping the property will appraise at that amount, or if it does not the new buyer will agree to pay the difference between the appraised value and sales price.
 
Option 5 is, in my opinion, the worst case scenario and one that we do not see taken very often.  Given the volatile market and uncertainty in appraisals most sellers, while strongly desiring Option 2 (buyers pays the difference) push for Option 3 (split the difference) or accept Option 1 (lower sales price). 

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     12 Comments

    • LovetheWeather says:
      June 29, 2009 at 12:49 pm

      Humm – I am not sure why the obvious additional options were overlooked. Standard commission is still 6% = $30,000. 6th option would be for buyers and sellers agents to cut commission to make up difference. 7th option would be for everyone to give a little so impact is minimized for all parties.

      Even if commission was originally 5%, which according to my wife is now the norm, we are still looking at $25k.

      This oversight in options may be one reason why RE-agents are getting such a bad rap.

      • Kellie says:
        June 29, 2009 at 7:27 pm

        Realtors will never go away. Like the unions that have sucked the life blood out of GM and Chrysler, CAR and NAR are in bed with Congress and Obama. It is a symbiotic relationship.

    • Talyssa says:
      June 29, 2009 at 1:57 pm

      seems generally sensible.

      In case you don’t know what HVCC is, its new regulation (started this year - Home Valuation Code of Conduct) that basically says loan officers no longer get to pick their special friendly appraiser and tell them what price they want the house to come in at. On one hand it means you really coudl get a bad appraiser that doesn’t know the neighborhood and doesnt’ value the property right, but the reason they did it is because there was massive and well documented appraisal abuse during the bubble, where loan officers were deliberately seeking out appraisers who would appraise to the loan amount that was desired.

    • Kellie says:
      June 29, 2009 at 2:13 pm

      Is there a collusion between Congress and NAR? they want to put a moratorium on HVCC because the prices now reflect the actual worth of the properties?

      “Rep. Travis Childers, D-Miss., is sponsoring the bill, HR 3044, and Rep. Gary Miller, D-Calif., is the lone co-sponsor to date. The bill, which would impose an 18-month moratorium on the Home Valuation Code of Conduct, was introduced June 25 and referred to the House Committee on Financial Services.

      Critics say that after the code went into effect on May 1, lenders began relying more on appraisal management firms employing appraisers who lacked experience in their local markets. Some appraisers are also relying too heavily on distressed properties when identifying comparable sales in valuing nondistressed properties, critics say.

      NAR and the National Association of Home Builders believe that low appraisals derailed many sales in May. A trade association representing appraisers, the Appraisal Institute, has also raised concerns about the code, but maintains that when appraisals don’t not match the sales price, the fault is with the market, not the appraisal.”

      http://www.inman.com/news/2009/06/29/bill-would-suspend-new-appraisal-rules

    • Surprised says:
      June 29, 2009 at 3:30 pm

      What I would like to understand is why appraisers force the replacement values to be equal to the market approach. They say that that part of the appraisal is not used and is meaningless. If so, why put it in there at all.. If replacement costs is higher than market prices, then it should show as such.

    • Tom M says:
      June 29, 2009 at 6:03 pm

      What kind of fool would pay more then the appraisal? You would have to be a class A jerk to do that.

      • Kellie says:
        June 29, 2009 at 7:19 pm

        There are still lots of fools out there, buying into the realtors’ bidding wars.

        • Tom M says:
          June 29, 2009 at 8:30 pm

          These people are amazing. We should put our addresses up here so these fools can send us the money they don’t need.

      • LovetheWeather says:
        June 30, 2009 at 12:12 pm

        I think you are not thinking about this right - the question is what should be the next step if an appraisal comes in under the offer price. If soneone really likes a house, the location, and plans to say for many years (10+), and the appraisal is only 1-2% different - then what the heck. Assuming they can really afford the mortgage locking in the cost of living will more than cover the delta in just 4-5 years.

        I sold a rental in 06 in northern CA becasue it got to be too far away to maintain. Bidding took the offer price $10k over the appraisal. I was more than willing to give up the $10k but the situation turned into a major pain because the RE-agents wanted me to give a credit back at closing so they still got their commission on the over inflated price. The deal almost actually fell through becasue of this - I actually had to sayforget it to the buy’s agent before they agreed to give me back the delta from their commission at closing. What is really sad for the buyer was that the tax base for the house was the inflated price not the appraisal. Other than saying they did not want to pay the $10k they were radio silent the whole time - now that is not too smart.

    • JK says:
      July 1, 2009 at 8:31 am

      Seems like we’re all on the right track. There are too many knife catchers I think that would pay the difference.
      Sure you can say what the heck if you’re going to be in it for years but in this market it’s more risky for the seller to walk away. I would get them to pay for the difference and at the very worst split it if you think it’s worth it. The thousands that you save can go a long long way.

      The NAR, CAR and realtards would love to do away with the new appraisal rules and go back to using their own cronies. Finally appraisers can do their job honestly without fear of repurcussions. ( that is..if the appraisal doesn’t meet the realtors goal they don’t get called back) From what I’ve seen of the new appraisal rules it’s working..don’t mess with it.

    • Jc says:
      July 1, 2009 at 12:32 pm

      Where is the “Drop-Prices”

      I have ti think,…that all this adds is given a good rating to the paper, other than that, I don’t see the point for these “People” to keep insisting in grotesques articles.

    • Flaaash says:
      July 1, 2009 at 10:34 pm

      Just wanted to let you and your readers know that the banks and RE are taking unethical approach to selling their homes. My offer got accepted by Chase bank for 620 Geneva. I signed and submitted the counter offer letter the next day, well within the 3 day time periods. Then the next afternoon, my agent hears that they went with another higher offer. Now I’m questioning if they used my offer to get more money out of the other buyer. Even if not, I feel like I was their reserve in their negotiations. What happened to those days where both parties were held accountable if either one broke the contract? My agent told me there’s nothing we can really do, is that true?