Selling a Home in Brooklyn (or anywhere else)? Think about the Appraisal!
Whenever I put a consumers house up for sale, one of the most frequently asked questions by the homeowner is …. “I heard it is hard for buyers to get mortgages these days, how do we know the buyers will be able to get the mortgage?” The answer to that question is simple... I, your professional real estate agent will check out their qualifications to make sure they can get the loan! However, I must caution that even when we thoroughly check out a buyers income, assets and credit scores, we can never be 100% certain that a buyer can get the mortgage. Generally speaking we can only be 99.9% sure. Do you know why that is? Because if by some stroke of bad luck the buyer loses their job or is run over by a truck (sorry to be so morbid), they will not get the loan. Now, of course, the odds of that happening are extremely remote, but you never know. Hence we can only be 99.9% sure.
When I put a deal into contract, I know that barring an act of g*d, my buyers will get the mortgage. Having said that, there is one item that really should be of bigger concern to a seller in today's market and that would be the BANK APPRAISAL! In case you are not aware, anytime a buyer goes for a mortgage, the bank sends an appraiser to physically check out the house, do research and make sure the house is worth what the buyers are paying based on today's market conditions. The appraiser will first look at the size, condition and location of the house along with the sales price in the contract which primarily becomes the target number. The appraiser will then look at what you call sales comps. These are similar homes that have sold in the area during the last, let's say, three months. The appraiser then does a side by side comparison to determine what the “subject property” (your home) is worth and makes a determination of its value.
If the appraiser's determination is that the house is worth the full sales price or more, all is well. If the appraiser's value comes in for less than the sales price, then there "is no joy in Mudville" so to speak. If the appraisal comes up short, the bank will turn down the loan giving the buyers the right to cancel the deal and get back their down payment. This is very painful for everyone involved, probably the homeowner (seller) more than anyone else. There can be very negative ramifications aside from just losing the deal. As an example, if the seller had gone into contract to purchase another home, that deal would also wind up faltering if the seller was relying on the proceeds of the existing home sale in order to close their next purchase. This is the reason why it is important for anyone selling one house and buying another to get a contingency in their contract to purchase regarding the sale of their existing home! At times this becomes problematic because (follow me here) the owner of the house that the seller is purchasing does not want to give a contingency on selling the existing property. Most of the time a seller's attorney will consider such a contingency to risky.
So the question begs to be asked, what happens if the bank appraisal comes up short? Well it goes a little something like this…You sell your house for $500,000 and the buyers are putting 20% down and seeking 80% financing which would equate to $400,000. If the bank appraisal comes in at $500,000, you are fine. But if the bank appraisal comes in for, say, $475,000... the bank denies the loan! At this point the buyer has the legal right to walk away and get their down payment back. In addition, as another option, the bank may offer to lend the buyers 80% of the appraised value. If you take 80% of $475,000, you have $380,000 the bank is willing to lend which is still $20,000 short of the necessary funds to close the deal. Although they are not obligated to do so, if the buyer is willing and able and chooses to, they can take an addition $20,000 from their bank account and add it to their down payment (making the new down payment $120,000 instead of $100,000) thereby making up the difference. Thus the deal can close. But again, the buyer does not have to do this and many times the buyer will not want to do this because they will feel as though they had overpaid for the house and may rather just walk away. Secondly, the buyer may not have that extra $20,000 to put down and so they would not be able to do so even if they wanted to.
So is there anything else that can be done to salvage the deal? Yes there is! If the seller is willing to they can simply lower the sale price by $20,000 to make up the difference and the deal will close! Again, the main thing is to make up the difference! I recently had a deal where the appraisal came up $20,000 short and the buyer put an additional $10,000 down and the seller took $10,000 off the sale price and made it work. They both felt a little pain but at least the deal closed!
If you are concerned about your home being able to appraise there are several precautionary measures you can take to help the cause. For example:
1) If you are relying on proceeds of the sale of your existing home to purchase your next home, make sure you get a contingency regarding selling your existing home written into your contract of purchase.
2) Have your real estate agent pull up recent sales of homes similar to yours justifying your sales price and provide them to the appraiser when he comes to appraise the house. If your agent has a hard time coming up with those comps, it will be very difficult for the appraiser to come up with them. It that case, be afraid…very afraid!
3) When the appraiser goes through your home, compile a list of all the updates and improvements you have done to the house which may increase its value (roof, electric, siding, etc.)
4) If you have a buyer giving an all cash offer, strongly consider it even if it is not your highest bid. If someone is buying all cash, there is no appraisal and you will not have this problem!
5) If you have a buyer coming in with a big down payment (50%), strongly consider it even if it is not your highest bid because in that case even if the house appraises for a little less, generally speaking it will not be a problem because the bank is only concerned that the loan amount not be more than 80% of the homes value.
If as a seller you do have a problem with the appraisal coming in short, you should be very open mined to giving the buyer some financial consideration to salvage the deal. Something is better than nothing. If your faced with the deal dying, and are still going to want to sell your home, keep in mind that when the next buyer comes in, unless you sell for less, you will most likely have the same appraisal problem again. Of course if not selling your home and just staying for like another 5 years is an option, then you do not have to worry about it.
I hope you find this information helpful and informative. If you have a question regarding this blog entry or Brooklyn real estate in general, submit them to my blog or contact me. Thanks for reading!!
© Copyright by Mitchell Feldman. All Rights Reserved. Republication or redistribution of this material is expressly prohibited without prior written consent by Mitchell Feldman. This information is deemed reliable but not 100% guaranteed. Mitchell Feldman is not at attorney and therefore not able to give legal advice. If you are involved in a real estate transaction and have a question, besides speaking to Mitchell, you should also speak to your attorney.