The house of your dreams...

When you put an offer on a home and the offer is accepted, the fun begins. 

Flurries of paperwork , phone calls and emails whirl from this person to that person, from agent to buyer to agent to seller to loan officer to underwriter to appraiser to underwriter to buyer to loan officer to buyer to loan officer to buyer to loan officer to appraiser to loan officer to buyer…well, you get the idea.  Its a maelstrom of documentation and questions and signatures.

Now, pretend you have offered $500,000 on a house that had a list price of $500,000 (I’m not going to cover all the possibilities here with bids, short sales and the like, just a straightforward purchase offer on a straightforward house).

You have the 20% down payment in the bank ($100,000) and you have a very nice credit score so you qualify for a loan with a low interest rate, lucky you.

The bank gives you money, whee!

The loan paperwork is going through without a hitch and then, oh, no!  The appraisal comes back with a house value of $480,000, not the $500,000 you offered on the house. 

What now?

The bank isn’t going to fund a loan for $400,000 (purchase price –  20% down).  They are only willing to fund a loan for $384,000 (house value – 20% down payment).

You’ll be presented with a choice.  You can either let the transaction fall through (TFT) or you can make up the difference between the purchase price of $500,000 and the amount the mortgage company will fund, $384,000.

If you decide to move forward with the purchase, you must cough up an extra $20,000 on top of your down payment of $96,000.  Well, actually, you must come up with an extra $16,000 since your down payment is $4k less…get that?  Everything is a moving target – well, exCEPT the amount the bank will fund!

The bank's preferred direction of money flow...

How does this happen and what can you do to prevent it?

It happens because so many properties are being sold at basement prices (sidenote:  Department stores used to move products to the basement when prices were significantly reduced.  They weren’t going to sacrifice precious 1st floor space with cut-rate stuff). 

Bargain basement saleSaleSALE!

Basement prices, short-sales (meaning that the list price is less than the loan amount owed) or REOs (Real Estate Owned = owned by the bank) combined with a smaller pool of buyers able to qualify means that sellers are taking what they can and getting out, some with just the shirts on their backs and lucky to have that.

Maybe not even a shirt...

There isn’t a foolproof way to ensure your offer is the appraised value of the property.  There’s no guarantee of anything, but a savvy Real Estate Agent will understand the history of sales in your neighborhood and what the market is doing.

If nothing else remotely comparable to the property you want has sold for $500,000, and you really, really, really want that house, then you need to have a reserve of cash in case the appraisal comes back for less than the purchase offer.  

Your house...as viewed by the appraiser.

Your agent can review sold prices of similar properties and recommend what your offer should be.  If the offer is countered at a higher price and you don’t have the green to make up the difference, then don’t accept the counteroffer.  Let everyone move on with their lives without tying up their hopes.

Unfortunately, there is no perfect way to ensure everything goes smoothly.  In some areas the market is moving down and down at the moment, so its possible that the appraisal from even 3 months ago won’t fly today.

Pretty, pretty please with sugar on top don’t make an offer that uses every dime you have!  You won’t have any wiggle room if the you-know-what hits the fan.

Don't expect to be saved by a quick trip to Vegas. When they say 'what happens in Vegas stays in Vegas', they're talking about your money, too!

Save more money than you need for the down payment.  You’ll have all sorts of unexpected costs associated with the house purchase, you know – taxes, fees, reports, repairs, whatever – plus you might want to change out some things before you move in – faucets, paint, carpet, landscaping, who knows.  You need a slush fund.  Don’t look at your bank account as the down payment fund.  Look at it as your down-payment-PLUS-fund.

There is no guarantee that a deal can be saved if the appraisal comes in too low, but its better be forewarned and anticipate what can happen.

Sometimes a counter-offer can come in that asks the buyers to pay for things that are many times paid for by the seller because the seller is just that close to the bone and doesn’t have the money to throw into the pot to get the house sold.

You gonna sell that heirloom jewelry?

Or what happens when the mortgage company says ‘No, you can’t buy this house as-is, you must put in a new potty or window or roof or take off the front porch because it was done without permits and I said so!’  Seriously, all those things can happen.

And, yes, a $$ shortfall can happen when you go get a construction loan, too.  As the market declines, your equity declines and the bank wants to see that you have more invested in the project and asks you to pitch in $20k of your hard-earned money and, dagnabit!, that was the money you were using to reroof the house after putting on the addition…what now?  You’ll have to cut back somewhere.  Either in finishes (granite?  no, how about formica) or in reducing the size of the addition, or even doing some of the work yourself.

No house is worth going to jail for!

Does this happen?  Absolutely!  We have a client reducing their addition size right now.  Of course, we also have a client who increased the size of their project!  Happy day!  We need more clients in THAT predicament!

So, save more moolah than you think you’ll need and expect surprises.

Good luck and may all your surprises be pleasant ones 😉

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