First Time Home Buyer -- Worried That Purchase Price Will Exceed Appraisal

[ReadySetMillionaire]

My girlfriend and I went to look at a house on Friday. It is a beautiful 1100 square foot ranch (with a completely finished basement, thus making it seem much bigger) and was listed at $135,000. It has new floors, 4 year old roof, new windows, new furnace, new stainless steel appliances, etc. More importantly, it is in Town B but has Town A schools (thus having best schools in area but low taxes). It is only one of three neighborhoods zoned like this and is the only one in our price range.

We loved the house and slept on it for two nights and went back on Sunday with a contractor friend of ours. He said everything was in top condition and that the only major repair needed was the electric box.

Unfortunately, we were there with the listing agent. Our agent was out of town for two weeks, we loved this house and didn't think we could wait (homes in this neighborhood fly off the market due to being in Town B but having Town A schools). Our buyers agent sent us a few comps which quickly showed that the list price had a much higher price per square foot (about $129) than any other home in the neighborhood (tops at about $105). We basically did everything on the phone with our agent but she was hard to get a hold of.

Nevertheless, we absolutely loved the house and put in an offer of $125,000. Things eventually settled at $127,500, and we felt that was a very good price given the desirable neighborhood and everything being finished and being new.

It's been just four days now and I'm very nervous about the appraisal coming in low. Our purchase price is at least $10 per square foot more than any other comp (although none of them were ranches and just three were in our exact neighborhood). Going just by this I am very concerned that the appraisal might come in at $115,000 or something even lower.

So, two questions:

(1) Are the comps the be-all end-all, or will the appraiser take into account the specific neighborhood (which is small and has very few recently sold comps), everything being new, finished basement, etc?

(2) If the appraisal does come in low, what happens? Do we renegotiate the purchase price? What's that process like considering we are working with a dual agent?

[FIRE me]

How long have the current owners owned this house? It sounds like a house flipper to me. I would never buy from a house flipper.

A contractor friend is no substitute for a house inspector. If the load center has problems, there are very likely other hidden electrical transgressions.

You don't have a dual agent. You are dealing with the seller's agent, which no doubt is causing much glee and evil cackling to said agent, when you aren't around to see it.

You say you settled on $127,500 but then you speak of opening negotiations again. Which is it? Either you agreed or you didn't. You really need to get YOUR agent involved in this, that is what he is paid for.

If you are dead set on buying this overpriced house, just make up the difference in the purchase price versus the appraisal with a larger down payment.

[frugaliknowit]

I'm not an appraiser, but a former realtor.  I do not believe that cost per square foot is a critical metric with residential houses.

[ReadySetMillionaire]

How long have the current owners owned this house? It sounds like a house flipper to me. I would never buy from a house flipper.

Lived in it since 2007.  They bought it for $120,500.  They didn't really "flip" it.  They fixed the roof, painted, installed new appliances, etc.

A contractor friend is no substitute for a house inspector. If the load center has problems, there are very likely other hidden electrical transgressions.

I understand your point, but the purchase agreement is contingent upon a satisfactory inspection.  If the house has a significant problem, the deal will not go through.

You don't have a dual agent. You are dealing with the seller's agent, which no doubt is causing much glee and evil cackling to said agent, when you aren't around to see it.

Ya, I feared this.

You say you settled on $127,500 but then you speak of opening negotiations again. Which is it? Either you agreed or you didn't. You really need to get YOUR agent involved in this, that is what he is paid for.

I've been told my numerous people that if the appraisal comes in under purchase price, you then re-negotiate with the buyer (as nobody would significantly overpay for a house and basically begin immediately underwater).

If you are dead set on buying this overpriced house, just make up the difference in the purchase price versus the appraisal with a larger down payment.

I don't think we have the cash to make up for a huge difference, so I don't think this is an option. Thus my question about re-negotiating. Hoping to hear from people with experience.

[DaveR]

(1) Are the comps the be-all end-all, or will the appraiser take into account the specific neighborhood (which is small and has very few recently sold comps), everything being new, finished basement, etc?

It depends on the appraiser, honestly. Comps are only part of the equation and most appraisers will take other factors into account. And if it does come in low, it might make sense to get a second opinion.

(2) If the appraisal does come in low, what happens? Do we renegotiate the purchase price? What's that process like considering we are working with a dual agent?

Uh, what does your offer say? Somewhere in all that paperwork this situation should be laid out. Low appraisal means you can't get a loan? Or do will you be forced to put more money down? Or is it grounds to terminate the contract?

As others have pointed out, you need your agent involved. If she's not available, get referred to another agent to sub until she's available.

The fact that you love the house and went for it with less-than-ideal agent support means that you getting pretty emotionally tied up in the deal. Easy to do with houses. But, remember, it's not the only house on the planet that is "perfect" for you. Proceed with caution.

[Uturn]

My first house appraised at $3k lower than my offer, so I backed out of the deal.  I was able to do this because I put in my offer contingent upon appraisal and inspection.  2 weeks later, the owner agreed to appraisal price.  I can't image a circumstance where I would pay above appraisal. 

[Drifterrider]

If you are living in the us:  You cannot be forced to buy the house.  The seller cannot be forced to sell it to you.

If you are taking a loan, the loan is probably contingent on the appraisal.  If the appraisal comes in low you have negotiating power to go back to the seller and ask for a discount.  If the seller won't budge and the bank won't budge and you want the house, you increase your down payment for the difference.

Depending on your jurisdiction and the rules in play there (North Carolina recently come up with something called "due diligence".  You specify the period of due diligence and might even pay a due diligence deposit (which is separate from earnest money).  Depending on how the sales contract is written you could be on the hook for the cost of the appraisal, any inspections and forfeiture of your due diligence payment; or not.

I suggest the "wait and see" approach (as there really isn't anything you do otherwise). 

[FIRE me]

How long have the current owners owned this house? It sounds like a house flipper to me. I would never buy from a house flipper.

Lived in it since 2007.  They bought it for $120,500.  They didn't really "flip" it.  They fixed the roof, painted, installed new appliances, etc.

That is good. I've noticed that there is a major difference between  houses that are fixed up to sell, versus houses that are fixed up to live in.

One possible remaining concern is the home owner doing well intended do it yourself work that is less than competently executed.
I suggest that you get a good home inspector, but do not rely one recommended by your agent.

[ReadySetMillionaire]

How long have the current owners owned this house? It sounds like a house flipper to me. I would never buy from a house flipper.

Lived in it since 2007.  They bought it for $120,500.  They didn't really "flip" it.  They fixed the roof, painted, installed new appliances, etc.

That is good. I've noticed that there is a major difference between  houses that are fixed up to sell, versus houses that are fixed up to live in.

One possible remaining concern is the home owner doing well intended do it yourself work that is less than competently executed.
I suggest that you get a good home inspector, but do not rely one recommended by your agent.

Went with the inspection company that my contractor friend recommended. And just to be clear, this contractor friend is a guy I've known since I was six, graduated high school together, went to college together, moved back home in the same year, etc. Very good friends.

[jda1984]

My first house appraised at $3k lower than my offer, so I backed out of the deal.  I was able to do this because I put in my offer contingent upon appraisal and inspection.  2 weeks later, the owner agreed to appraisal price.  I can't image a circumstance where I would pay above appraisal.

This seems like the most likely scenario to me.  If your offer is contingent on financing and it doesn't work because of the appraisal being low that gives you leverage to renegotiate the price.  It's unlikely another buyer will come along and make an offer that will not take this into account.  Unless you don't have an offer contingent on financing--then you'll have to pony up the difference or walk from the deal.

[Easye418]

My first house appraised at $3k lower than my offer, so I backed out of the deal.  I was able to do this because I put in my offer contingent upon appraisal and inspection.  2 weeks later, the owner agreed to appraisal price.  I can't image a circumstance where I would pay above appraisal.

Try living in North DFW TX.  Multiple bid offers on almost every home sub $300k.  It's almost expected to pay over asking and over appraisal.

[Gone Fishing]

Sorry to state the obvious, but do your comps have full basements, or are you only comparing heated sq ft?

[La Bibliotecaria Feroz]

We had a house not appraise. Came in 35K low because the appraiser apparently can't recognize an egress window when she sees one, and discounted the whole basement.

The sellers were willing to renegotiate, but not that low.

What we wound up doing was changing lenders. Apparently you can (at least in CO) order a new appraisal if you change lenders. Pushed closing back two weeks and we had to shell out another few hundred or whatever they cost.

The new one came in at purchase price, which was frankly disappointing since we knew the sellers were willing to move on price! Oh, well. So we paid the price we had previously said we were willing to pay.

[Uturn]

My first house appraised at $3k lower than my offer, so I backed out of the deal.  I was able to do this because I put in my offer contingent upon appraisal and inspection.  2 weeks later, the owner agreed to appraisal price.  I can't image a circumstance where I would pay above appraisal.

Try living in North DFW TX.  Multiple bid offers on almost every home sub $300k.  It's almost expected to pay over asking and over appraisal.

Really?  The house I am referring to is in Euless.  I've done 3 house deals in the last 15 years and never paid asking. Cheapest was $65k, most was $152k

[Easye418]

My first house appraised at $3k lower than my offer, so I backed out of the deal.  I was able to do this because I put in my offer contingent upon appraisal and inspection.  2 weeks later, the owner agreed to appraisal price.  I can't image a circumstance where I would pay above appraisal.

Try living in North DFW TX.  Multiple bid offers on almost every home sub $300k.  It's almost expected to pay over asking and over appraisal.

Really?  The house I am referring to is in Euless.  I've done 3 house deals in the last 15 years and never paid asking. Cheapest was $65k, most was $152k

Oh hell yeah. Stupid Toyota is bringing thousands of Californians over and they are buying homes in cash. State Farm and a million other companies are moving headquarters here too. Big time sellers market. I bought my house for $331k last September, I'm putting it up for sale in January now (unfortunately) for $390kk and it will sell at ask only a few grand below.

[Spork]

My first house appraised at $3k lower than my offer, so I backed out of the deal.  I was able to do this because I put in my offer contingent upon appraisal and inspection.  2 weeks later, the owner agreed to appraisal price.  I can't image a circumstance where I would pay above appraisal.

Try living in North DFW TX.  Multiple bid offers on almost every home sub $300k.  It's almost expected to pay over asking and over appraisal.

Really?  The house I am referring to is in Euless.  I've done 3 house deals in the last 15 years and never paid asking. Cheapest was $65k, most was $152k

Oh hell yeah. Stupid Toyota is bringing thousands of Californians over and they are buying homes in cash. State Farm and a million other companies are moving headquarters here too. Big time sellers market. I bought my house for $331k last September, I'm putting it up for sale in January now (unfortunately) for $390kk and it will sell at ask only a few grand below.

Yeah, I lived in DFW for 20+ years and this seems really really weird to me, too.   But lots of friends in the area confirm it.  There is a lot more demand than supply.

I've also heard there is some weird "it didn't sell in 1 week AND I WILL NEVER EVEN BOTHER TO LOOK AT THAT PIECE OF CRAP!" thing going on.  To me that says if it happens to have been over priced a couple of months ago, it may very well be a bargain now.

[kib]

It will depend on your contract and your realtor should be able to clarify for you.  We put an offer contingent on appraisal, the appraisal came back low.  We could have walked away but the seller was willing to drop the price to appraisal so we rewrote the contract.  The bank didn't have a problem with this, I suppose they could have declined the loan if we had ignored the appraisal and stuck with the original deal, but we were putting down enough to cover the difference anyway, so maybe not.  20-20 hindsight:  pay attention to why the appraisal is low.  We didn't really listen, and while some of the low-appraisal chickens have not come home to roost, enough have that i wish we'd bought something else.

[Gerard]

Maybe a different perspective from me: It seems like there are two different issues here.

The first is whether you would have trouble with financing if the sale price is over appraisal. I had this with an earlier purchase -- the bank thought the condo was worth less than my purchase price, so I ended up having to find another $4k at almost the last minute.

The second is whether your offered price is what *you* think the house is worth, appraiser or no. Maybe it has things that matter to you that other places don't, or lacks things that are generally appraised for a lot. If you don't plan to resell for a while and you won't wake up every morning going "Shit! I got ripped off!" you might be okay with an over-appraisal price.

For example, my house has things that I like that add almost nothing to its appraised value -- south-facing garden, fertile soil, plum tree, walking commute, street-level basement door that I can ride my bike right into. And it lacks things that appraise high, but that I don't need -- a garage, shiny appliances, big square footage.

[catccc]

From what I've heard, if the sale price is in the ballpark, the appraiser will appraise it at the sales price.  This is beyond stupid IMO, but I guess the price someone is willing to pay is the true market value of the house.  I really hate that it goes this way, because I feel like the appraiser should do his/her job independent of the sales price.

Good luck!