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A:When the buyers don't actually have the money they are offering.
I just wanted some input on a situation we've found ourselves in as sellers, and I wonder how common it is. A buyer put an offer in for our house giving us the asking price, plus an additional $5K to cover our costs. So we had an offer of $5K more than asking. Obviously this seemed a good deal and we accepted. Contracts were signed, inspection done.... but then comes the appraisal.
The appraisal comes in at our original asking price. Therefore the bank will not lend the buyers the additional $5K. The buyers have now asked us to accept just the asking price.
Now this is disappointing of course, because we thought we had a great deal. And pardon my lack of experience in this field, but I didn't realise an appraisal could screw everything up like that. The house was taken off the market immediately following the contract so that meant no alternative offers in the meantime. Who knows, maybe someone else would have offered the same but actually had the money to spend... or perhaps not.
Apparently this "happens all the time". But if that is so, shouldn't we have been warned the additional $5K would probably never materialize thanks to an appraisal matching our asking price only? I'm just not sure what to make of it all. I suppose I feel that we would have considered other offers in the meantime and have now lost that time (about a month). Why did the buyers offer the extra when they didn't have any prior authorisation from their mortgage company? They literally offered something they never had.
So is this really how the process operates normally?
There is nothing to indicate that the buyers don't have the money. If you were in their situation would you pay $5000 more for a house than an independent appraiser has indicated is the value?
Who could have warned you? An agent? They generally don't know precisely what the appraisal will be.
The appraisal has ZERO to do with what the buyers can afford. You have no idea that the buyers could not get a mortgage for the additional $5000 they offered. The bank will not lend on an amount over the appraisal.
I understand the disappointment and frustration, but you have a some misunderstandings about selling and buying real estate.
Firstly, I am sorry that you are going through this. Appraisers can REALLY turn a deal upside down in half a shake. To make things worse, they are typically very difficult to reason with, and most are not interested in seeing information that would change their valuation on the property.
Depending on the state, the buyer most likely has an exit clause on his financing addendum for a low appraisal. We have no way of knowing whether the buyer can afford the extra $5,000, and in all honesty, it's of no consequence in this situation. The buyer does not want to shell out the extra money, and thats not really something that we can blame them for.
As real estate professionals, we do our very best on both sides (usually), to make sure we are giving clients the best possible advice about fair pricing on a property. However, we cannot predict what an appraiser will do. I have had properties that I was sure would appraise come in $6,000 low, and I have had deals where I thought it would never appraise, but appraised for well over the asking price (client got too excited in a multiple offer situation).
What type of loan program did he have? If it was a FHA (or VA i believe), the appraisal is still valid for 6 months, and attached to the property address in the government systems. This could be beneficial because it could put future buyers at ease on the pricing, and you will have a firm negotiating hand if your market is favorable to the seller. Also, for a smaller fee, the buyer's should be able to transfer the appraisal into their name, instead of paying for a whole new one (there are certain contingencies to doing this, this is not guaranteed).
There is nothing to indicate that the buyers don't have the money. If you were in their situation would you pay $5000 more for a house than an independent appraiser has indicated is the value?
Who could have warned you? An agent? They generally don't know precisely what the appraisal will be.
The appraisal has ZERO to do with what the buyers can afford. You have no idea that the buyers could not get a mortgage for the additional $5000 they offered. The bank will not lend on an amount over the appraisal.
I understand the disappointment and frustration, but you have a some misunderstandings about selling and buying real estate.
I'm sure I do have some misunderstandings, and I'm happy to be educated
You ask if I would pay over the appraisal? The buyers most probably did have a rough idea of the value before the offer. We just asked for what the comparable market value was at the time. They deliberately offered over the asking price to secure the deal, not because they thought the house was actually worth the extra. I doubt they were under any illusions as to the true value of the house.
But that aside, you ask who could have warned us? Surely if this is common then it could have been mentioned. If buyers offer more than the asking, then isn't it very likely the appraisal will come in lower and therefore the bank won't lend? So offering extra is probably a worthless gesture (unless they are cash buyers).
How can you say an appraisal has zero to do with what buyers can afford and then say a bank will not lend more than an appraisal? What am I missing here. The buyers can only afford what the bank will lend them. They are totally reliant on that. And the bank is reliant on the appraisal.
It was made clear to me that the bank wouldn't lend over the appraisal and since their offer was over that amount, their "offer" was worthless. I'm not saying the buyers would have seen it coming. For all anyone knows the appraisal could have been any amount, less or more. I'm not trying to blame them, just understand if this is very common or not.
Why would someone want to spend more than the appraised value? You can always ask for a review of the appraisal and have your agent submit comps supporting the sales price, but if she had them, you probably would have listed at that number.
I'm sure I do have some misunderstandings, and I'm happy to be educated
You ask if I would pay over the appraisal? The buyers most probably did have a rough idea of the value before the offer. We just asked for what the comparable market value was at the time. They deliberately offered over the asking price to secure the deal, not because they thought the house was actually worth the extra. I doubt they were under any illusions as to the true value of the house.
But that aside, you ask who could have warned us? Surely if this is common then it could have been mentioned. If buyers offer more than the asking, then isn't it very likely the appraisal will come in lower and therefore the bank won't lend? So offering extra is probably a worthless gesture (unless they are cash buyers).
How can you say an appraisal has zero to do with what buyers can afford and then say a bank will not lend more than an appraisal? What am I missing here. The buyers can only afford what the bank will lend them. They are totally reliant on that. And the bank is reliant on the appraisal.
It was made clear to me that the bank wouldn't lend over the appraisal and since their offer was over that amount, their "offer" was worthless. I'm not saying the buyers would have seen it coming. For all anyone knows the appraisal could have been any amount, less or more. I'm not trying to blame them, just understand if this is very common or not.
All good questions.
- The agent representing the buyer could have poorly researched his market analysis, giving the buyer the impression that the home was worth more than it was.
- The practice of offering more than the list price is common in hot markets with low inventory. It is also used if the buyer is low on cash, and needs closing cost assistance. In essence, the buyer agent would structure a message to the listing agent during negotiations to the effect of "I understand that you are not able to sell the house for $x, but my clients need $x in closing cost assistance. We would like to raise the offer price to include this cost, and have you assist with settlement expenses". This is essentially rolling the costs into their mortgage. When this happens, all parties need to be aware of the appraisal, and have a firm understanding that a low appraisal could derail the entire deal.
- Banks will not lend over the appraised value because the house is their collateral. I had an appraisal come in low with a buyer who could have paid cash for the property, and was approved for $90,000 OVER the offer price. The appraisal is a security measure for the lender, and not for the buyer.
- The buyers did have a valid offer, and a valid contract. Just because the deal failed to close due to a low appraisal does not make his offer any less valid than another. Did your agent discuss with you her opinion of value? Did she feel as if the home would appraise for the extra amount?
- Does your property back up to power lines, or perhaps a major roadway? In some markets, this can drop your appraisal by as much as 10%. This could have simply been an oversight by all parties.
- Appraisers are their own breed. Even if the numbers all looked great on paper, we can be surprised with the appraisers valuation. Sometimes, it just comes out of left field, and there is no way to predict it.
Best regards!
Last edited by jameshardin; 02-04-2014 at 05:48 PM..
Reason: Grammar.
Depending on the state, the buyer most likely has an exit clause on his financing addendum for a low appraisal. We have no way of knowing whether the buyer can afford the extra $5,000, and in all honesty, it's of no consequence in this situation. The buyer does not want to shell out the extra money, and thats not really something that we can blame them for.
I hope this helped!
Yes it helped
You say we have no way of knowing whether the buyer could have afforded the extra $5K? But I was told the bank wouldn't lend on the total amount, therefore they could no longer afford it. So is that not correct then? I suppose we have no way of knowing whether the buyer has $5K tucked away in a bank somewhere, that is true. But I was given the impression they are reliant on the bank loan, and this is the reason for rescinding their original offer.
I don't blame the buyer not wanting to pay an extra $5K. Buying and selling is all about bargaining and getting the best deal, and that's fine. But why make the offer in the first place? I can't believe they felt the house should be appraised at the higher price and so decided to offer more than we were asking. I got the impression they knew our asking was probably a fair appraisal and that the offered extra purely because they "really wanted this house". And their offer successfully took our house off the market.
This is just me trying to understand the process fully. If the deal falls through we'll be back to square one and maybe I can learn from this. One thing is for sure though, if a buyer came in with a great offer above our asking price I'd just assume it would never actually happen (unless they were cash buyers). It seems like the appraiser is king where mortgage deals are concerned.
You say we have no way of knowing whether the buyer could have afforded the extra $5K? But I was told the bank wouldn't lend on the total amount, therefore they could no longer afford it. So is that not correct then? I suppose we have no way of knowing whether the buyer has $5K tucked away in a bank somewhere, that is true. But I was given the impression they are reliant on the bank loan, and this is the reason for rescinding their original offer.
I don't blame the buyer not wanting to pay an extra $5K. Buying and selling is all about bargaining and getting the best deal, and that's fine. But why make the offer in the first place? I can't believe they felt the house should be appraised at the higher price and so decided to offer more than we were asking. I got the impression they knew our asking was probably a fair appraisal and that the offered extra purely because they "really wanted this house". And their offer successfully took our house off the market.
This is just me trying to understand the process fully. If the deal falls through we'll be back to square one and maybe I can learn from this. One thing is for sure though, if a buyer came in with a great offer above our asking price I'd just assume it would never actually happen (unless they were cash buyers). It seems like the appraiser is king where mortgage deals are concerned.
- The bank won't lend above the appraised value, out of self preservation. Its similar to how a pawn shop operates (on a much larger, more structured level). When taking an item into their inventory, the will only lend an amount that they know can be easily recouped with a sale. The bank does not want to be totally upside-down on the mortgage, and then have to approve a short-sale or foreclose it. I think "so they can no longer afford it" was a horrible way for the bank to phrase it. Or was this from the buyer's agent? If it came from the other agent, they really might not be able to afford it. Like I said earlier, it really does not matter if they can or can't, it's ultimately whether they want to or not. (sorry if that sounded harsh).
- Both of the agents could have felt as if the home would appraise for the extra value. I have been left scratching my head on a conference call with the other agent, wondering how an appraisal came in so low. If there was absolutely no way that the home could appraise, the buyer's agent should have interceded and informed his client of this, and dissuaded him from a high offer, no matter how much the buyer wanted it. Conversely, your agent should have given you a professional opinion on the offer, and its viability. Both agents could have preformed stellar price analyses, and been on point. One appraiser can definitely undo two agents due diligence.
A:When the buyers don't actually have the money they are offering.
I just wanted some input on a situation we've found ourselves in as sellers, and I wonder how common it is. A buyer put an offer in for our house giving us the asking price, plus an additional $5K to cover our costs. So we had an offer of $5K more than asking. Obviously this seemed a good deal and we accepted. Contracts were signed, inspection done.... but then comes the appraisal.
The appraisal comes in at our original asking price. Therefore the bank will not lend the buyers the additional $5K. The buyers have now asked us to accept just the asking price.
Now this is disappointing of course, because we thought we had a great deal. And pardon my lack of experience in this field, but I didn't realise an appraisal could screw everything up like that. The house was taken off the market immediately following the contract so that meant no alternative offers in the meantime. Who knows, maybe someone else would have offered the same but actually had the money to spend... or perhaps not.
Apparently this "happens all the time". But if that is so, shouldn't we have been warned the additional $5K would probably never materialize thanks to an appraisal matching our asking price only? I'm just not sure what to make of it all. I suppose I feel that we would have considered other offers in the meantime and have now lost that time (about a month). Why did the buyers offer the extra when they didn't have any prior authorisation from their mortgage company? They literally offered something they never had.
So is this really how the process operates normally?
Yup this is the way people buy houses. This is a common strategy for a buyer to tie up the property and get it off the market as you found out. Now they can attempt to get you to give in on that extra 5k and settle on your asking price. They got to be first in line due to the higher offer, your hope/want of getting that extra 5k and now you have a choice
Agree to their 5k off demand
Or
You in turn can go back and say that the buyer has to come up with the extra 5k that they offered out of pocket or the offer is void and you go back and relist the house. Personally I would refuse to play games and tell them cough up the 5k or deal is off.
It's really hinged on how badly do you want to sell vs the buyer playing with you and if that 5k is worth your time or not.
- The agent representing the buyer could have poorly researched his market analysis, giving the buyer the impression that the home was worth more than it was.
- The practice of offering more than the list price is common in hot markets with low inventory. It is also used if the buyer is low on cash, and needs closing cost assistance. In essence, the buyer agent would structure a message to the listing agent during negotiations to the effect of "I understand that you are not able to sell the house for $x, but my clients need $x in closing cost assistance. We would like to raise the offer price to include this cost, and have you assist with settlement expenses". This is essentially rolling the costs into their mortgage. When this happens, all parties need to be aware of the appraisal, and have a firm understanding that a low appraisal could derail the entire deal.
- Banks will not lend over the appraised value because the house is their collateral. I had an appraisal come in low with a buyer who could have paid cash for the property, and was approved for $90,000 OVER the offer price. The appraisal is a security measure for the lender, and not for the buyer.
- The buyers did have a valid offer, and a valid contract. Just because the deal failed to close due to a low appraisal does not make his offer any less valid than another. Did your agent discuss with you her opinion of value? Did she feel as if the home would appraise for the extra amount?
- Does your property back up to power lines, or perhaps a major roadway? In some markets, this can drop your appraisal by as much as 10%. This could have simply been an oversight by all parties.
- Appraisers are their own breed. Even if the numbers all looked great on paper, we can be surprised with the appraisers valuation. Sometimes, it just comes out of left field, and there is no way to predict it.
Best regards!
Great post, thanks. I highlighted the part about all parties needing to be aware because I think this is the real sticking point for me. We weren't made aware that this type of contract had a high chance of derailing on appraisal. Being inexperienced in selling we just assumed the offer was good no matter what.
I'll get over it of course, but I do feel a bit under-informed. Oh well.
I think we and the agent were spot on in setting the asking price really. We just looked at comps and gauged it from there. And the appraisal came in at exactly what we were asking for it originally.
You perhaps make a very good point about the buyer being misinformed by their agent. It's possible their agent gave an overly high appraisal and that misled the buyers into believing they could safely offer more. I guess we'll never know.
No power lines or freeways btw. It's a pretty straight-forward home without any major drawbacks. We've been happy living here anyway! And if there is an appraisal on record now that matches our asking, then that's got to be a plus.
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