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I guess this must be a common question but I could not find any strategy or answers so here we go -
Let's say I put an offer for $400K with FHA loan. House needs repairs - cost $40K. If appraisal is $440K or above everything is good. What happens if appraisal comes out at say $420K? I am assuming appraiser will include those repairs and appraise the house based on that, right? If that is true my offer of $400K was too high to begin with and should have been $380K. Isn't that correct? When people say try to find a middle ground - do they mean middle ground between offer price and appraisal or do they mean middle ground between (offer+repair) and the appraisal?
What you are mentioning - deducting the repairs from the appraisal is called a Cost-To-Cure
Suggest you look into an FHA 203k loan. A portion of the loan proceeds is used to pay the seller, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.
As for the middle ground - it depends on your negotiating skill. Plus how fast the seller is looking to sell.
Realize the price can be inflated up to come down.
Do you research on the values of the neighborhood.
Find out how long home has been on the market.
Make your first offer low - saying your really interested if the price can be lowered.
Strongly recommend having the home inspected (not an appraisal). An inspection will give you a detailed report on the condition of the property. The cost is around $450 - this is your report, that can point out flaws that you can use to negotiate the price lower.
Another suggestion is first getting pre-approved for a mortgage.
That way you know your sending limits.
Able to furnish a Pre-Approval Letter to show the seller you are qualified.
Let's say I put an offer for $400K with FHA loan. House needs repairs - cost $40K. If appraisal is $440K or above everything is good. What happens if appraisal comes out at say $420K?
Depends.
If you have an appraisal contingency in your offer, you get to renegotiate. If you don't have an appraisal contingency, you're buying the house for $400K.
Quote:
Originally Posted by alpha_1976
I am assuming appraiser will include those repairs and appraise the house based on that, right?
Don't ass-u-me anything. An appraisal is generally for the fair market value as is. If you want an appraisal based on potential repairs you have to ask for it.
Quote:
Originally Posted by alpha_1976
If that is true my offer of $400K was too high to begin with and should have been $380K. Isn't that correct?
Sure. But the problem is what can you do about it.
Quote:
Originally Posted by alpha_1976
When people say try to find a middle ground - do they mean middle ground between offer price and appraisal or do they mean middle ground between (offer+repair) and the appraisal?
I have no idea what that means.
I suggest you google "how to buy a house" and study everything you can find. Your questions bespeak a dangerous naivete.
Investors try to pay 66% of appraised value so you don't have to deal with any other problems that may turn up. Usually a property that has blemishes like this will not sell unless it is in a hot market. I would not become attached to a specific property unless there are specific reasons that you need that exact property. I'd be very careful I did not get stuck with additional problems. I would be very reluctant to pay over 80% of appraised value even if I really wanted this blemished property. People just don't pay full price for dinged up cars or houses. Most people won't even buy them.
The appraiser values the house based on the current condition. Future repairs play no part in the appraiser's value.
Not necessarily. An appraisal can be done "subject to" repairs, making the extraordinary assumption that the repairs are completed and issuing a market value based on that, with the understanding that if the repairs are NOT made, it may affect the opinion of value.
I thought I understood you til I read the other answers.
Clarify if you are talking about a FHA 203K rehab loan? I think you are.
Appraisals for those will be the estimated value after the proposed repairs.
Thanks for asking this. I somehow thought when I say FHA with repairs that automatically meant FHA rehab. I see now that is the correct term to use. Yes it's FHA rehab loan. And that's why my question -
I offer $400K. Bank accepts. Repairs are about $40K. Appraiser comes back and says it's $420K after repairs (I am assuming appraiser will give me number based on repairs and you confirmed that). Do usually people renegotiate if that happens? If yes, what should be the strategy? I am not backing off or anything (we have already the offer in place and accepted by the bank) but I don't want to pay the least I can. Repair order has been prepared and in place. Appraisal must be coming any day. I want to understand this situation before I have to decide. Thanks
I offer $400K. Bank accepts. Repairs are about $40K. Appraiser comes back and says it's $420K after repairs (I am assuming appraiser will give me number based on repairs and you confirmed that). Do usually people renegotiate if that happens? If yes, what should be the strategy? I am not backing off or anything (we have already the offer in place and accepted by the bank) but I don't want to pay the least I can. Repair order has been prepared and in place. Appraisal must be coming any day. I want to understand this situation before I have to decide. Thanks
I think the answer to your question is that you really want it to appraise at $440. Try not to overthink what-ifs until they happen, but if the appraisal comes back low, it means the bank won't loan the full value including your repairs. They will not loan more than the appraisal. You will either have to renegotiate the purchase price, or revise your repair estimate.
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