RealTown's RealTalk

I am working with Buyers on a property that appraised $10K below the agreed price.  We insisted on a condition in the P&S that stated the property must appraise for selling price.  P&S is fully executed...any suggestions on how I can save my clients from having to increase their out of pocket expenses?  The original deal included $5K cash back from sellers towards closing costs and prepaids, including FHA fees.  the seller's agent has many more years of experience than me.  Appraisal has been examined with fine tooth comb and beyond a couple of minor errors, it looks accurate and the lender is satisfied. 

Thanks for your suggestions.

Well, when you put in the caveat about the property needing to appraise for the full sales price, how did you word it?  What is the stated effect on the contract if the property fails to appraise?  Most commonly, it gives the buyer the ability to walk away, same as if they didn't get their mortgage.  So, if that is the case with your contract, why not go back to the sellers and their agent with the appraisal, and ask them to reduce the sale price to the appraised value?  Chances are you now have a voidable contract, with all the cards held by the buyer.  Worst that happens is that the seller says no we aren't lowering the price at all, find a way to come up with it.  Best that happens is they see the phrase in the contract, reflect on how long it will take them to sell the property again and POSSIBLY get more than they can get by reducing, and accept the appraised value as a sale price.  Your buyer client has little to lose here.  The notable exception being that there's another buyer waiting in the wings, perhaps even a written backup contract, which the seller takes as soon as you say you want a reduction.  You have to research that possibility and asses the risk yourself.

The P&S is very simple (attorney verbage) stating "home must appraise for selling price".  In the Offer to Purchase it was phrased home must appraise or seller will renegotiate.  I see now that more detail regarding consequences to seller would have been helpful to my buyer.  The biggest sticking point for my buyer is they have $1000 out of pocket on inspections, including general, pest, mold and radon.  I'm waiting to hear back from attorney if Seller's have to negotiate or if they can just say we're not going to sell you this house at that price.  They will be moving in with parents while they search for suitable new housing so motivation is questionable.

Susan.... hang tough.

$1K for inspections, sure seems high... may be large
house?.....oh well..

Seller does not HAVE to re-negotiate.

You must put the options to the buyers and let them
decide.... 1) Insist upon the reduction, and threaten,
nicely, to bail out.  2) Come up with the cash difference.
3) Get Seller to carry back a 2nd for the $10K, with
lender's permission. 4) Let Buyers get used to the fact
that they may have to kiss that inspection money goodbye.
But usually these things happen for a reason, and it
means a better house will happen. 5) If you aren't good
at it, you need to learn to do some serious kissing-up to
the other agent.... you want him/her to battle for you, not
against you. You'd best be VERY charming. If you are
aloof or stoic, this deal will tank. 

If buyers agree to let you, you can bluff.... threaten to walk.
It might work, but it might backfire. However, it's not your decision....
don't bluff without their permission... all you can do is present
the options. The good thing about a bluff, is that, when not
playing poker, if it doesn't work, you can still agree to their terms.
(No other contracts in the wings....)

FYI, all FHA contracts have that stuff about how it must appraise,
which is one of various reasons why some agents won't do
FHA, especially if numbers are tight. If you cannot challenge the
appraisal, you just have to work with what you have.

If you have any more info... you have many here that will help
you brainstorm...

Lindy in Houston

Each state is a little different.  In MN, FHA has very strict guidelines regarding appraisal and even has an escape clause in the addendum.  I just had this same thing happen with my buyer and the seller had to come down from $380 to $360.   I advised the buyer to ask the seller to come down or walk away.  I know it can be hard to advise a buyer to walk away from a deal but I would never suggest to a buyer to pay over appraised value, even if they had the cash.  There will be another property and your buyers will thank you for working in their best interest.  It doesn't matter that the other agent has more experience, after all, they overpriced it to begin with. 

I am working with Buyers on a property that appraised $10K below the agreed price. We insisted on a condition in the P&S that stated the property must appraise for selling price. P&S is fully executed...any suggestions on how I can save my clients from having to increase their out of pocket expenses? The original deal included $5K cash back from sellers towards closing costs and prepaids, including FHA fees. the seller's agent has many more years of experience than me. Appraisal has been examined with fine tooth comb and beyond a couple of minor errors, it looks accurate and the lender is satisfied.

Thanks for your suggestions

I am a little confused you are working with a buyer. Do you have a agreement with your buyer, if so you work for them. You called them your client. Try to get the contract reduced 10,000 for your buyer.

I just had the samething happen, 50,000 under the offering price. I told the listing agent and said my buyer is not going to pay more than the apprised value. I furnished the listing agent with a copy of the appraisal with written approval form the lender and the appraiser. Told the listing agent to have her seller get an appraisal as well and we will check out the difference. I actully was supprised the appraisal came in that low, but when I check the comps, I came in at 2000 more. It looks like the seller is going to reduce the price by $50,000. I will Know tomorrow. Good luck. Isee it happening many time now with the market. Sellers can get a contract, but if it does no appriase out the buyer does not get the money, unless there is extra to put down.

The P&S is very simple (attorney verbage) stating "home must appraise for selling price". In the Offer to Purchase it was phrased home must appraise or seller will renegotiate. I see now that more detail regarding consequences to seller would have been helpful to my buyer. The biggest sticking point for my buyer is they have $1000 out of pocket on inspections, including general, pest, mold and radon. I'm waiting to hear back from attorney if Seller's have to negotiate or if they can just say we're not going to sell you this house at that price. They will be moving in with parents while they search for suitable new housing so motivation is questionable.

If it did not appraise out for that buyer, most likely it will not appraise out for the next buyer and the seller still has his house.