New House appraisal came lower than the purchase price (Dallas: buyers, elementary school)

[turf3]

Some options:

1) Pay the $35k, reduce your down payment by the same amount, leave loan balance the same. Interest will go up a little because you now have less than 20% down. Your cash out of pocket is essentially unchanged.

2) Pay the $35k, leave your down payment the same as it was before, loan balance will now go down by $35k, so both interest should go down a little because you now have more than 20% down, principal will go down by $35k.

3) Pay $35k, adjust the down payment so it remains at 20% of the new, lower loan balance (which is not $35k lower, but is somewhat lower). Interest rate stays the same, principal goes down a bit.

These 3 options still end up with the builder getting the purchase price that the buyer and the builder agreed to, and they end up with the mortgage company funding the purchase at the value their appraiser tells them the house is worth. It seems to me that any of the three would be acceptable to both the builder and the mortgage company.


4) Get the builder to reduce the purchase price by $35k or some fraction thereof, to match the appraised value. Why would they do this? They have a signed contract where you agreed to pay the purchase price. They are not expecting your repeat business. If you walk the deal in high dudgeon, they keep your $70k and they can reduce the price for quick sale. The next buyer might get a bit of a deal.

5) Hunt around and get an appraisal at or above the purchase price, and then convince the mortgage company to accept this appraisal in lieu of the one they already have on hand that tells them it's worth $35k less. Why would they accept this appraisal? If anything I would guess that their captive appraiser over valued the house in order to get the gap between valuation and purchase price small enough that you could cover the gap and yet not increase the risk to the mortgage company; and that another appraiser would be likely to value it even lower.

6) Go to another mortgage company in the hopes that somehow magically their terms will offset the $20k discount the builder offered for using their own mortgage company.

7) Walk the whole deal, giving up $70k in nonrefundable deposits etc. and starting over, later in the bubble cycle so the same house optioned the same way will probably now cost you more.

8) Hire good (relatively honest) lawyers who will advise you that with a signed contract, you are limited to the options above or variants thereof. Cost: fairly small lawyer's fees plus go back to the top.

9) Hire bad lawyers who will tell you they can fix the problem, will drag everyone into court where a judge will look at the signed contract and tell you to get out. But the lawyers will get their fees.

[Lowexpectations]

Originally Posted by SouthernBelleInUtah

Good builders would advise that the level of upgrades may affect the ability to appraise at agreed upon price. That's a LOT of upgrades.

Even if that was true I don't think that splits the blame evenly. The builder at the end of the day doesn't control the appraisals nor do they control the buyers wants. It's the buyers responsibility to read the contract they are agreeing to, in my mind placing the vast majority if not all the blame on the buyer

[Threestep2]

Originally Posted by SouthernBelleInUtah

Good builders would advise that the level of upgrades may affect the ability to appraise at agreed upon price. That's a LOT of upgrades.

The buyer's financial situation is not the builder's concern. Buyer wants something and agrees to a price. At the end of the day it can add up. Common sense for me is to pay upgrades outright to keep what used to be HUD1 low. For giggles - run OP's upgrades on a 30 year mortgage calculator. He did not answer my question if this is his first purchase or purchase/upgrades. Carpet or vinyl in the foyer of an 800k house to save by replacing it after closing? I spent some time in construction lending - sometimes all you can do is shake your head and hope for the best.

[turf3]

In my opinion, the only thing you can say about the builder in this scenario is

"It would probably be helpful if the builder's practices as to keeping the buyer updated on the effect of upgrades that are unlikely to appraise at purchase cost, were to be updated and made more pro-active."

I can see no evidence of legal or moral wrongdoing on the part of the builder here, just an opportunity where they could improve their customer service. Of course we don't have the whole story from both sides, which would be impossible anyway in an internet forum.

[nissan]

Originally Posted by Threestep

The buyer's financial situation is not the builder's concern. Buyer wants something and agrees to a price.

Exactly. It's not the builder's fault or responsibility to inform a buyer that they're putting too many upgrades into a home. $100K in upgrades isn't crazy at that price point anyway (for example, in our neighborhood, someone put in $100K on a $550K base and it appraised w/o issue). I doubt OP's the only home in the neighborhood w $100K in upgrades. Nonetheless, just bc the OP feels like it's a big deal, it's definitely not bc the builder failed to advise.

[accent2010]

Originally Posted by anksagr

Hi all,
Need urgent advice from the knowledgable group. We are building a new house with KHov and have already paid around 70K to the builder (35K base advance + 35K upgrades advance). We are less than one month to close and the appraisal done by the mortgage company (KHov mortgage) came at 35K less than our contract price.
The builder is saying that the appraisal is locked in and I need to comeup with 35K extra money. Since the contract is a builders contract, there is no appraisal contingency in the contract, so if I walk away from the house, i would loose my 70K deposit.
It wont be easy to arrange another 35K within couple of weeks of time. The builder is not willing to reduce the price. What are my options at this time? Should I seek legal advice ?

Would appreciate responses from the group.

All mortgage companies want to make money from the interest but they also consider the risk. If they appraise it for $35k less, then the house should be $35k less than the contract price. Maybe the market has changed since you signed the contract.

[Threestep2]

Originally Posted by accent2010

All mortgage companies want to make money from the interest but they also consider the risk. If they appraise it for $35k less, then the house should be $35k less than the contract price. Maybe the market has changed since you signed the contract.

I cannot follow you.

"They" as in mortgage company do not appraise or set purchase prices. The appraisal has nothing to do with the contract between buyer and builder.

[turf3]

Originally Posted by Threestep

I cannot follow you.

"They" as in mortgage company do not appraise or set purchase prices. The appraisal has nothing to do with the contract between buyer and builder.

Correct, the appraisal is supposed to reflect what the mortgage company thinks they could sell the house for if they have to foreclose and get their money back out of it.

If you agreed to pay $500,000 for a $200,000 house, the purchase price is between you and the seller, but the mortgage company is only going to write a mortgage based on $200,000.

[turf3]

And for that matter, paying way over value is one way in which frauds are perpetrated, so I expect controls on this kind of thing are in place. That's how the I-20 condo frauds happened.

I am in no way suggesting the OP is doing anything fraudulent, just commenting on why appraisals will have to reflect a realizable market value.

[Threestep2]

Originally Posted by turf3

Correct, the appraisal is supposed to reflect what the mortgage company thinks they could sell the house for if they have to foreclose and get their money back out of it.

If you agreed to pay $500,000 for a $200,000 house, the purchase price is between you and the seller, but the mortgage company is only going to write a mortgage based on $200,000.

What do you mean by "supposed to"? The days of creativity are gone. Appraisers have guidelines they have to follow. Appraiser and mortgage company are not affiliated (hopefully!!!).

To me it looks like his wish list overloaded reality. It happens.