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Appraisal came in 27k under purchase price, will I be forced to cancel?

I put in an offer price of 210k on a property that was listed at $199,000 with an appraisal contingency and a clause that I'd pay up to $7,500 if appraisal came in low up to purchase price. So say for some miracle, if appraisal came at 203k, I'd still be willing to purchase property for 210k.

The problem we are coming across is this is FHA loan and had to get TWO appraisals because the property was 90 day flip, first appraisal came in at 200k and second one at 183k . I think their list price at $199k was over market value when my realtor and I first looked at comps, we had expected appraisal to come in ball park of 185k-190k.

I can't afford to pay more than 7500$ in cash difference. we sent an extension request for appraisal and loan contingency yesterday because they requested an appraisal rebuttal and also sent an addendum to purchase price for them to lower it to $190,500. My realtor says they will mostly likely send us a notice to buyer to perform and cancel transaction within 48 hours and I can lose my earnest deposit.

What can I do from here? The seller agreed to accept my offer knowing if appraisal came lower, I'd only pay difference of $7500. They're the ones that want to dispute the appraisal and they are the ones making me not perform to contract. I am doing everything on my part.

any help/advice would be much appreciated. I am truly in love with the house. It has taken me 8 months to find it and I live 2 hrs away and already in plan of moving my life into 'my new home' and I'm scared I have to start over :(
  • June 15 2013 - Parkway
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Answers (13)

@ SoCal_Engr

At that rate of appreciation, no appraisal is going to keep track with offer prices. Looking at that trendline though, a correction may seem near.

I had the same issue in 2007, but in reverse. All my sales showed - say - a home to be 'worth' $500K but there were plenty of active listings nearby that were not selling for $400K . Should I appraise it at $500K just because the comps showed the home to be worth that even though if a bank took it back, they would never be able to sell it for $500K ? And I be held responsible maybe for the difference ? That's why we look at ACTIVE and PENDING listing in addition to sales - something Zillow does not factor in (yet).

In this case I - as the appraiser - might think that 48% appreciation may turn right around and even though the buyer loves their $210K home, it may not be worth that next year. In an appraisal the lender is asking us what homes similar to this HAVE sold for, not what they may sell for in the next couple months. The difference between offer price and appraisal value is, in essence,  a 'risk factor' the lender is more than happy to have the buyer come up with the difference for......

  • June 15 2013
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....we can have more time to dispute the FHA appraisal.

Fa getti about it. Disputes rarely change the value - for many reasons. Plus answering disputes are not on the top of an appraisers 'to do' list as the appraiser does not get paid to answer the dispute, and has every incentive NOT to change the price, it would simply mean they did not do their job in the first place.

To have a value changed in a dispute, YOU need to have (1)  BETTER comps than the appraiser. Comps that are BETTER - not higher - but BETTER comps than the appraiser used and an (2) appraiser who can readily admit they were wrong or drunk or whatever the first time around.

The reason you are buying over appraised value is that 48% increase in values. Appraisal values are HISTORIC meaning the look BACKWARD. A 48% market increase will almost always result in appraisal values being less than true market values, by their very nature. Appraisal values are NOT forward looking, but offer prices almost always are. Appraisal values DONT forecast what value should be when escrow closes, the show what they were, which in your case may be 4% -12% LESS sijnce comps go back 90 days.

You probably are in good company with your appraisal value NOT hitting the (probably correct) market value of the home. You can ...

1- Hope values turn around and head south, which may occur if rates climb.

2- Pony up the extra $$

3- Look for a new home.

  • June 15 2013
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@ Vince...

Based on posts, the current appraisal-of-record stands at $183K. So, the gap between appraised value and offer price now stands at $27K.
  • June 15 2013
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Given Sac has gone up 48% in the last 12 months, you might reconsider finding that extra $7500....
  • June 15 2013
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The good news is that you shouldn't lose your EMD. Cancel and move on if you can't buy this one.
  • June 15 2013
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Profile picture for SoCal Engr
"My realtor offered 210k because after talking to the seller agent, that's what was hinted at him, "We're looking for someone that can offer over listed price but can come up with most cash difference'."

First, your REA didn't offer the seller anything. You did. Maybe a semantic, but it drives me nuts when consumers start talking as if the REA owns the transaction and decisions. REAs give advice, consumers make decisions.

Second, your REA is lacking either brains or integrity if he argued for offering $210K because that's "what was hinted at him", when his own CMA indicated $185K-$190K. While, from a "human perspective" I'd prefer it was brains, either is reason enough for me to kick them to the curb.
 
If he's that stupid, you need someone with more on-the-ball on your side. If he's unethical enough to deliberately overbid, counting on the low appraisal to provide negotiating leverage - what makes you think he'll treat you any differently when push-comes-to-shove?

At worst, your offer should likely have been at $197K (the high end of your REA's estimate-of-value plus the $7K you're willing to toss in over appraised value).

Now? Good luck.
  • June 15 2013
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Profile picture for wetdawgs
"I'd be a dummy to pay $27k over appraised value."   Well, yes, that is true but what do you call bidding $20k to $25k more than what your agent thought it would appraise for?   (Your agent gets gold stars for being within ~1% of the appraiser's number at the low end of the agent's range)

Good luck.  If I were the seller I'd put the house back on the market.



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Profile picture for user2796514
Wetdawgs, I am approved for more than 210k mortgage that isn't the question here. It's not up to me how much the house appraises for, my lender is the one deciding. If the house appraised at 210k, I'd be fine but I'd be a dummy to pay 27k over appraised value.

SoCal, The lender is deciding to go with the lowest appraised. I'm assuming this is the normal practice and after viewing the 1st appraisal that came at 200k, it's questionable, the appraiser used comps crossing major intersections and almost 2miles away from subject property. The appraisal that came in at 183k used comps within ~.5 miles. My realtor offered 210k because after talking to the seller agent, that's what was hinted at him, "We're looking for someone that can offer over listed price but can come up with most cash difference'.

Elizabeth, I am not doing anything not out of good faith. the Sacramento area right now is just stabilizing. I had very high hopes that we wouldn't have an appraisal issue. Trust me, I'd rather have had the property appraise at offer price than deal with this now but with new HVCC changes and such, my REA asked me what most can I afford if the property would not appraise (Low ball appraisals have been a huge issue in Sacramento from what I'm being told) and I'm putting everything I have left to afford a house to get the property. I am more than willing to work with seller in disputing the appraisal.

Amy and Bernard, I have not removed the appraisal contingency. The 17th day is Sunday and we sent the seller a request of extension so we can have more time to dispute the FHA appraisal.

I would hate to walk away from the property but it just doesn't seem like the seller wants to lower price even though I have stated in contract the MOST I'd pay over appraisal.
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If you were my client, well first off you wouldn't be my client because I would never work with a client who did what you just did, but if you were somehow, by accident, I suppose, I'd refer you to a lawyer right now for legal advice. Not only could you be risking your earnest money deposit, but the question of good faith covenant might come into play and the whole thing could erupt into one hideous lawsuit.
  • June 15 2013
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First of all, if you have not removed your appraisal contingency, and you cancel due to the appraisal, then you will get your earnest money back (assuming it's sitting in the escrow account and you haven't already released it to the seller). You should not worry about the deposit.

It sounds like you and your agent were banking on the fact that the appraisal was going to come in lower than your offer and you could get the property for less. (The difference between $210k and $185k is way more than $7,500.) If the seller gives you a Notice to Perform, you will just have to walk away from the property unless you are willing and able to come up with more money out of pocket.

However, if the seller is rebutting the appraisal, I think there is a good chance they will hold off on the Notice to Perform. They clearly want to make the deal happen and wouldn't cancel while they are trying to make the numbers work. If you want to hang in there, you can wait until they get a new appraisal or issue the Notice to Perform.

Chances are, in this market, they have other buyers waiting in the wings. So you unfortunately don't have much leverage (with one caveat - if the other buyers have FHA financing also, then the sellers are stuck with these appraisals for 6 months and they may be more willing to make a deal with you.) . I know it sucks to fall in love with a home and then not have it work out, but it happens. You may just need to move on. Best of luck.
  • June 15 2013
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You should not lose your earnest money deposit unless you have removed your appraisal contingency. Presumably you have not removed your loan contingency either, as you don't have a loan commitment yet.

Your earnest money deposit  should never be at risk unless you have removed all contingencies.
  • June 15 2013
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Profile picture for SoCal Engr
"My realtor says they will mostly likely send us a notice to buyer to perform and cancel transaction within 48 hours and I can lose my earnest deposit."

Can someone explain why the earnest money would be forfeit? The house didn't appraise, even within the $7.5K window of the offer. Based on the appraisal contingency and the low appraisal, I'd think the OP's REA should be beating on the seller to reduce the price to no-more-than $5K above appraisal (but then, only because of the silly offer to go up-to-$7.5K over appraised value).

"...first appraisal came in at 200k and second one at 183k."

So, what is the value being used? 183K? At $200K, that's only $2.5K off of the $210K offer (counting in the $7.5K "extra cash").

"I think their list price at $199k was over market value when my realtor and I first looked at comps, we had expected appraisal to come in ball park of 185k-190k."

So, why in the world did you offer $210K? And, what was your REA's input and/or reaction to offering 10%-11% over what the estimated value?

I have to agree that I'd be a bit PO'd as the seller. Then again, as a flipper I'd be doing whatever I thought it took to make you live up to the $210K offer vice dropping the contract price.
  • June 15 2013
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Profile picture for wetdawgs
You are in the conundrum that comes from overbidding.  If the seller doesn't wish to drop the price then you're pretty much stuck if you can't come up with more.

"we had expected appraisal to come in ball park of 185k-190k".
   I suspect that is the problem right there.   When the appraisal came in slightly lower than the range you expected,  there wasn't enough wiggle room in your purchase offer.  (If I were a seller, I would be annoyed so am not surprised at your seller's response.)

When  you next find a house of interest, don't bid more than you can afford. 

  • June 15 2013
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