Imagine you’ve finally found that old house of your dreams. It may need a little work to be perfect, but the current owner has done a lot of upgrades, and you know this is the old house you want to call home. The owners have priced the house based on local values and the upgrades they’ve made, but they drop their asking price down to $210,000 in hopes of finding a buyer. Then, even though the owners have already lowered their price, they drop it even more to accept your offer of $205,000. You are thrilled and already contemplating your family moving in and all the changes you are going to make.
Not so fast — first you have to wait for the lender to receive an appraisal of the new property.
Low appraisals create problems for home buyers
An article I recently read about an ongoing problem in many real estate markets brings to light the detrimental effect low appraisals are having on buying and selling homes. As values continue to drop in some areas, the issue may only get worse.
I first became aware of the problem about 2007, and it quickly became a major obstacle to overcome with every home I built and sold. I know a person who, as I write this, has been anxiously awaiting news as to whether she’ll be able to close on her new home in a western state due to a low appraisal.
Lenders have become very strict these days due to recent issues with sub-prime mortgages. So what about our scenario of the old house purchase mentioned above? Let’s say you’ve managed to scrape the required down payment together and are already approved for the loan. You are waiting for settlement and ready to back up the moving vans. Then the appraisal comes in at $190,000 — $15,000 less than the purchase price. Now what?
It means the lender is only going to make a loan based on the current appraisal value of $190,00: the $205,000 price on your sales contract with the owners is between you and the owners to work out – the lender is only going to finance a $190,000 home. So the owners are either going to have to lower their price an additional $15,000 or perhaps meet you in the middle. Or you’re going to have to come up with the difference for the sale to proceed if you need the loan to close the deal.
Low appraisals were very rare occurrences during most of my construction career, but they have become an epidemic lately due to falling home values in the last several years. If you’re considering an old house purchase or placing your home on the market, it’s definitely something to keep in mind.