Yesterday we used our day off for President’s Day to schedule a home inspection on what will hopefully be our very first home. As you may recall, this is our second time we have made it past the attorney review period in what is our now seven+ month quest to purchase a home. As our prior post on the subject detailed, the first time we attempted to buy a home things did not go so well during inspection.
Needless to say we were both very stressed out yesterday about the prospect of another house deal falling apart due to inspection problems. Even at the inspection stage buyers might have already dumped $500.00-$2,000.00 into the home buying process. Luckily the home passed its inspection with flying colors.
“This time it’s going to be different”, we said. “Everything is going great!” And it was… until today, when the appraisal came back. The verdict: the home under appraised by $6,000.00.
I am sure in this market plenty of buyers and sellers are facing this exact difficult scenario. When I first learned the appraisal report results I was really hard on myself. “What kind of an idiot am I?” I thought. “I’ve been looking for a home in this market for six months. I thought I knew the market pretty well by now, and I still got ripped off!” With reports of a possible imminent double dip in housing this was the last thing I was hoping for, even though we plan on this being our “forever house.”
Once I got past my feelings of frustration towards myself and my worry over the house deal falling apart, I decided to talk to a few real estate attorneys I am friends with and do some online research on the available options if a home under appraises. Since we are going the 15 year FHA mortgage route, the home has to appraise even though we are putting a healthy chunk of cash down. This under appraisal will also have to be disclosed by the seller to any other FHA buyers during the next 6 months*. As far as I can discern, there are three major options available to buyers/sellers when a home does not appraise.
Option #1 If a Home Under Appraises - Ask the Seller to Lower the Agreed Upon Price to the Appraised Value – The seller is in a difficult situation here. If the buyer walks they will only lose the cost of inspection and other related costs. The buyer need not purchase this house and in many instances does not need to purchase a house at all. The seller on the other hand generally wants out of the house, and will have to sell the house at some point. Divorce and death make up a lot of selling situations, so there are often time constraints and outside factors at work. If the seller does not take less money now there is still no guarantee this whole scenario will not play out again the next time around. There is also no guarantee (in most instances) that another buyer might even be willing to pay this price in the first place. In a down market this type of scenario only gets tougher for the seller. At the same time, some buyers can get emotionally attached to the property. I know that personally I am quite sick of the house search process. I am even sicker of my apartment. Finally, part of my personal code of honor feels slightly bad about trying to now pay less than I previously agreed to pay.
Option #2 If a Home Under Appraises – Buyer Walks – Most real estate clauses will contain a contingency that will protect the buyer if they cannot obtain a mortgage. In a situation where a home does not appraise, the buyer may decide to walk if a seller decides they will not eat the difference. This is obviously not an ideal situation for either party. The buyer must have seen something in the home that made them want to purchase it and the seller will in most instances have to take less money later on down the line anyway. (particularly right now when the market seems to be spiraling further downward). If this occurs the buyer would still under most circumstances have the option of bringing more cash to the closing to make sure that the deal still gets done.
Option #3 If a Home Under Appraises – Negotiate Somewhere in the Middle – Perhaps some magic can be worked with closing costs or the like. There are usually no hard and fast rules. For instance, in our example we could meet in the middle, we could pay $1,000.00 and the seller $5,000.00, or anywhere in between, unless we could not obtain a mortgage having done so.
Although a home not appraising is not ideal for either the buyer or the seller (and we certainly wish we did not have to personally deal with it), there is no reason why an under appraisal has to (unless the house drastically under appraises) be a deal breaker. To be sure, a lot of the above assumes there is not too large of a disparity between the homes appraised value and the contracted for purchase price.
We have asked for the seller to agree to take $6,000.00 off the purchase price but we stand willing to bargain to some extent as necessary. Again, a lot how you would go about handling this situation comes down to personal preference and individual style.
That said, if we have to walk away, then we will.
Here’s hoping that does not happen.
Anyone have any experience as a buyer or a seller with a home under appraising? Any creative ways around this problem that I have missed? What do you think we should do? Is it immoral to agree to something and then try and back out, or is that just a smart financial decision? Let me know what you’re thinking!
(*Please note that I am not giving legal or any other type of advice, but rather talking about my own experiences in New Jersey. The law may be different where you are or even different in New Jersey depending upon your situation. As always, please consult with a proper expert if you require such expert advice. Thank you.)*