Tag Archives: exlusive buyer’s agent

05.14.13
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What to do if your appraisal comes in below contract price?

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Anyone that has ever purchased a home, or is in the process of purchasing a home, knows that it is not a simple task. You can’t just write a check, or swipe your credit card, and even if you pay cash it is still a complicated, time consuming process. These last few months (in DFW) have been the most active months in real estate since the housing bubble burst. Inventory is low, prices have started to creep up, and low interest rates have been driving buyer’s out in droves. Just because your offer is accepted by a seller, and you enter into a contract to purchase, nothing is set in stone and you are not guaranteed to close on the property. There are many different stipulations that must be met in order for the contract to remain valid, and if either party to the contract does not follow or adhere to their contractual obligations, then the other party may terminate without penalty. In recent months we have begun to see many contracts terminated due to the appraisal coming in lower than the sales price of the house. In order to protect their investments, lenders require that the appraisal come in at, or above the amount being loaned. If the appraisal comes in less than the borrowed amount, the lender will not have sufficient collateral, and they will not make the loan. The reason we are starting to see all of these low appraisals is tied directly to the rapid market fluctuation. Over the past few years home prices have been depressed for a number of reasons. We started to see a ton of homes go into foreclosure because so many people took out mortgages they just could not afford. Following the housing bubble, the rest of the economy entered into a recession, and this led to mass unemployment. The fear and uncertainty from the recession kept all the people that could buy on the sidelines. Now that things are starting to look better, people are not scared to spend their money. With things looking up, and interest rates still at record lows, all those people that were waiting on the sidelines have decided that NOW is the time to buy. With so many buyers, available inventory has shrunk drastically, and anyone that knows basic economics should understand supply and demand. We have a low supply and a huge demand, so what happens? Prices go up! and up, and up, and up! Prices have not increased too rapidly, but sellers are catching on and prices are definitely creeping up. On top of this we have many homes receiving multiple offers, this turns into a bidding war, and now homes are selling more than asking price. This is great for the sellers, but due to the extremely short period in which we transitioned from a buyer’s market to a seller’s market there are not enough comparable’s to justify these new higher prices. Eventually the market will correct itself, but for the time being, we have to be aware of the possibility that any home sold may come up short on the appraisal. When this happens, deals start to fall apart, and people begin to question whether or not they should be purchasing a home. But just because an appraisal comes in short, there is no reason to immediately assume that a deal is dead. Depending on how short the appraisal is, there are a few different strategies one could take to overcome this obstacle. The first option would be for the seller to lower the price to what the appraisal says. The next option would be for the buyer to bring additional cash to cover the difference between the loan amount and the purchase price. If nobody is willing to take care of the appraisal issue themselves, then the next, most obvious solution would be for both parties to split the amount. So for example: Mr. A is purchasing a home from Mr. Z for $560,000 but the appraisal comes back and says the home is only worth $500,000. When an appraisal comes in this low the seller is generally going to be paying more of it than the buyer, this is because if the deal falls through and Mr. A walks, whoever comes along and enters a contract with Mr. Z will run into the same problem. So no matter who buys the home, Mr. Z will have to realize he is asking too much and will most likely not sell it to anyone for his price. So he must then decide whether or not to cancel his listing, or to come down in price. Nothing is ever set in stone though, and no two deals are alike, the seller could be very stubborn or emotionally attached to his home and refuse to come down in price, or the buyer could refuse to come up in price. Either way we have the same situation, after agreeing on an initial price and terms, if the home does not appraise the buyer can either negotiate the price down, offer to put more money down, or terminate the contract. Playing with the price is the most common way two parties resolve the low appraisal situation, but if you or your agent can get creative, you will usually be able to find something the other party would want or need. Examples of this would be the buyer allowing the seller to lease back the property for XX amount of days at no cost to them, or maybe the seller can leave their furniture to the buyer because they had to put more money down in order to close. Every real estate deal will be different, and everyone has different needs, if you are able to understand what makes the other party to a transaction tick, you should be able to add something to the deal that they value (besides money) so much that they can overlook the appraisal. There are always going to be certain properties that do not appraise, regardless of the state of the economy. But as we get further away from this recession, and as more homes begin to close at these higher prices, we are going to start seeing a decline in the amount of low appraisals. This is because after a certain amount of time there will be more and more comparable that appraisers are able to use when determining the value of  home. As long as you know that an appraisal coming in short could jeopardize a deal you are working on, you will be able to enter negotiations with a game plan already in place for if this does happen. With this knowledge you should be able to negotiate effectively, using logic and reason, not emotion, when coming to terms with another party. And if for some reason the appraisal comes in low, you will already be prepared to continue in a rational manner. Many times people will do great up until the point where they receive a low appraisal, and then as soon as they realize they may need to bring more cash to closing, or they will not be selling their home for as much as they would like, a switch goes off in their head and they go into a purely emotional reaction. This is what causes deals to fall apart. This is also a time when most people begin to wish they had been working with a Realtor instead of going at it alone. An agent will be able to handle minor hiccups like this without a problem, and they can then pick up the pieces, save the deal , and continue with the transaction. So if anyone out there is thinking about purchasing a property, I would highly recommend calling and interviewing a few exclusive buyer’s agents, and then hiring whoever you felt was the most knowledgeable and willing to dedicate as much time to working with you as needed. And because you will spend a lot more time with a buyer’s agent than you would with a listing agent, I highly recommend that you higher someone that you think will get a long well with you. And you also need to remember the best thing about buyer’s agents: THEY DON’T COST YOU A DIME! So if anyone out there is looking for a new home, and you would like for someone to assist you with your house hunt, I would love the opportunity to assist you with locating a home and sharing everything I know about real estate, and then using what I know to help you negotiate the best possible terms on whichever home you decide to make a move on. And to anyone out there that actually reads my blogs, thank you for supporting me, and helping me to grow my web presence. It means a lot to me that people are interested in what I have to say. Until next time, THANK YOU ALL!!

P.S.

If anyone out there has anything they would like for me to write about, or if there is anything or any way that I could make it better, I would truly appreciae the feedback, even negative feedback. It is my goal to build this site into a resource that will help anyone that is interested in purchasing a home in NE Tarrant County, specifically Southlake, Colleyville, Westlake, Troph Club, and Keller. THANKS

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