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Price per sqft/appraisal

3,175 Views | 25 Replies | Last: 6 yr ago by dcAg
Bertrude
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Looking at a brand new home under 1800 sqft in a North Austin suburb priced at $176 a square foot. Granted it has spray foam insulation, tankless water heater, hardwood floors, 65' lot, smart features, etc.... I'm concerned that there aren't any comps near this price point with this small amount of square footage in this area. What happens if the appraisal can't meet the sales price?
valtosca
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AG
The onus is on the seller to prove the value or reduce price should the appraised value not come in at the contract price.
TamuKid
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AG
valtosca said:

The onus is on the seller to prove the value or reduce price should the appraised value not come in at the contract price.


Normally not the case with new construction homes. Normally the builder contracts protect the builder. If it appraised low, the BUYER pays the difference at close.
voorheesdn
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AG
Read your builders contract carefully. As previously stated a new construction home heavily favors for the builder and it much you can do about it. In a resale situation you will have a number of remedies for a shortage in appraisal value.

Happy to talk you through it if you like.
david@voorheesteam.com or 512-422-2033.
SteveBott
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AG
The lender will take the lower of sales price or appraised value. Typically the seller has no obligation to lower their price.
Diggity
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AG
That can be the case with new construction contracts, but not the Texas 1-4 resale contract (assuming there's a 3rd Financing Addendum).

edit...You're correct that the seller has no obligation to lower the price, but it's also true that the buyer has no obligation to buy the house.
jpb1999
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AG
To piggy back on this this thread... we are selling our house and we agreed to an offer, so we are in the option period. We are about to do inspections, but then we have to go through an appraisal.

So to my question, we are in an area where home prices are pretty high and homes in high demand, compared to the areas surrounding it. We had the house on the market for 3 days, had 16 showings, and received 3 offers with 1 more coming but decided they did not want to be a back up. 1 below asking, one at asking, and 1 $4000 more than asking. So that seems to prove what the house is worth. BUT we are worried the appraisal will not adjust enough for this hot area. Plus it is a unique house in a great location, and not many homes probably have sold near this sqft, so probably not many good comps. If they have to go outside of this hot area, the price per sqft may go down to much.

Current offer is $229K, What if it appraises for $200K, what happens?

TIA!
_________________________________________

Spane Bohem


aggiepaintrain
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AG
jpb1999 said:

To piggy back on this this thread... we are selling our house and we agreed to an offer, so are in the option period. We are about to do inspections, but then we have to go through an appraisal.

So to my question, we are in an area where home prices are pretty high and homes in high demand, compared to the areas surrounding it. We had the house on the market for 3 days, had 16 showings, and received 3 offers with 1 more coming but decided they did not want to be a back up. 1 below asking, one at asking, and 1 $4000 more than asking. So that seems to prove what the house is worth. BUT we are worried the appraisal will not adjust enough for this hot area. Plus it is a unique house in a great location.

Current offer is $229K, What if it appraises for $200K, what happens?

TIA!

the low appraisal clause your realtor built in the contract should spell it out for you.

Otherwise, you lower the price after renegotiating with the buyer on a new price as they will have to put more in the deal at closing, or wait for a cash buyer.
Or fight with the appraiser which will get you no where as they are omniscient


Just ask one.

SteveBott
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AG
Diggs what version on the addendum are you using? I just got a 11-2-2015 and it says nothing about the home meeting appraised value only of the need for one.
Diggity
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AG
hope this shows up

SteveBott
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that says nothing about an appraisal coming in low. Just that the buyer gets approved. So buyer meets all assets, credit and income minimums but the sales price is 225K and appraisal comes in at 220K does not let the buyer walk with his escrow returned.
Diggity
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Is one of the lender underwriting requirements that the property appraise for the contract price?
SteveBott
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Nope. they dont care. Everyone else does but not them. They look at it as if the value comes low they are protecting themselves and their clients who buy the loans from a badly priced deal.
Diggity
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I'm not really sure what you're getting at.

Fact is, if the lender will not loan on the property because of a low appraisal, then the buyer has a contingency to get out of the contract (with their earnest money). TAR is very clear about this.

Now there are situations where the buyer is putting down a large down payment (relative to the contract price) so the lender might still be comfortable approving the property, but that's not what I'm talking about.
SteveBott
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AG
The lender will not turn the deal down letting the buyer out of the contract. It is that simple. You WILL be approved with a low appraisal. So

sales price 225K

10% down and loan of 202,500

appraisal comes in at 220K

10 down, loan based on appraisal and the loan is 198,000

Someone has to make up the 4500 difference in the loan amounts. But the loan is approved just on 220K
Diggity
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AG
Steve, the 3rd Party Financing spells out how much the buyer is financing. If that number changes, then the buyer can get out of the contract.

You guys may have a different interpretation of the document, but it really doesn't matter.
jpb1999
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AG
The realtor just said, and it is in the contract, that the property must appraise for sales price.

So from Steve said, the buyer would have to agree to original sells price and find another $4500 to cover the difference, or we renegotiate the selling price down to $220K. Correct?

Thanks guys!
_________________________________________

Spane Bohem


aggie appraiser
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jpb1999 said:

To piggy back on this this thread... we are selling our house and we agreed to an offer, so we are in the option period. We are about to do inspections, but then we have to go through an appraisal.

So to my question, we are in an area where home prices are pretty high and homes in high demand, compared to the areas surrounding it. We had the house on the market for 3 days, had 16 showings, and received 3 offers with 1 more coming but decided they did not want to be a back up. 1 below asking, one at asking, and 1 $4000 more than asking. So that seems to prove what the house is worth. BUT we are worried the appraisal will not adjust enough for this hot area. Plus it is a unique house in a great location, and not many homes probably have sold near this sqft, so probably not many good comps. If they have to go outside of this hot area, the price per sqft may go down to much.

Current offer is $229K, What if it appraises for $200K, what happens?

TIA!


This (bolded section) has been addressed several times in the past, but obviously, not everyone spends a bunch of time on the RE board.

"So that seems to prove what the house is worth."
If you have a cash buyer, it would prove it. If you have a buyer who has the financial ability to make up the difference between the appraisal and the sale price, it would prove it. If you have a buyer who can't make it happen, it doesn't prove anything.

I've seen contracts written stating that the buyer will bring extra cash to closing if the house appraises for less than the sale price. If I had a question about the house appraising, especially if I took a bid for more than the sale price, I would make sure it was in the contract.

In this case, I would make sure the $4,000 over the list price was going to be covered by the buyer and that they knew up front that there wouldn't be additional negotiations if the appraisal came in at the list price.

Martin Q. Blank
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Diggity said:

Steve, the 3rd Party Financing spells out how much the buyer is financing. If that number changes, then the buyer can get out of the contract.
If appraisal is low, the buyer is borrowing less. If he's approved for more, he's approved for less. Financing addendum does not get him out of the contract for low appraisal.
aggie appraiser
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aggie appraiser said:




"So that seems to prove what the house is worth."
If you have a cash buyer, it would prove it. If you have a buyer who has the financial ability to make up the difference between the appraisal and the sale price, it would prove it. If you have a buyer who can't make it happen, it doesn't prove anything.

I've seen contracts written stating that the buyer will bring extra cash to closing if the house appraises for less than the sale price. If I had a question about the house appraising, especially if I took a bid for more than the sale price, I would make sure it was in the contract.

In this case, I would make sure the $4,000 over the list price was going to be covered by the buyer and that they knew up front that there wouldn't be additional negotiations if the appraisal came in at the list price.



To add to my prior comments. Imagine this scenario.

You are tasked to appraise a 3 story townhome in the most exclusive neighborhood in your county. There are 4 sales in the prior year ranging from $675,000 to $725,000. All the units are very similar in size, condition, and quality, and they are all the same age. There are minor differences in how they are oriented. Some face traffic, some face a small park. These sales indicate a market value of $700,000.

The townhome you are appraising has a contract price of $800,000. There are no other 3 story townhomes within 10 miles.

Who in their right mind is going to lend 80% of $800,000 on a townhome that is probably worth $700,000?

To make sure the investment is sound, the lender is going to lend 80% of the appraised value ($700,000), and the buyer is going to put the rest of the money up at the closing table. Lender puts up $560,000 and the buyer will have to provide $240,000. The deal can be done, but the buyer is going to have to assume a larger portion of the risk.

Hopefully, this somewhat real example illustrates why things are the way they are.
TresPuertas
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AG
Well put.

I always tell people that it isn't the buyers money they are negotiating with, it's the lenders. If you want a house (or townhouse in this case) so badly it's YOUR responsibility to make up the difference. Not the lender's.

Edit to add the following: ppsf is only really relevant in the scenario Aggieappraiser illustrates above. The properties have to be homogeneous and have the same features as the other comparables in the area. When looking at single family homes a lot is built into the price per square foot number and that doesn't always tell you everything. Comparables can sit on larger lots, be significantly nicer on the inside, include a pool, sit on a busy road, etc. Appraisers will somewhat consider the price per square foot number but it's far from being a reliable indicator of value

It's fairly simple
jpb1999
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I see your argument and understand the lender holds the power, but that doesn't change the market determined value. Something is only worth what someone else is willing to pay for it... in my case there are 4 people willing to pay that within 3 market days. Your right, if cash buyer this is a moot point. Also, I had to take this offer as we had multiple offers and could only hold them for an acceptable amount of time. If we could leave on the market longer maybe a cash buyer would have offered ina few days or weeks, but we'll nevet know unless this deal falls through.

You also confirmed a good point... the appraiser works for the lender so they will try to lower it as much as possible for the lenders benefit. I wish there was more of an impartial middle man determining value.
_________________________________________

Spane Bohem


TresPuertas
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jpb1999 said:

I see your argument and understand the lender holds the power, but that doesn't change the market determined value. Something is only worth what someone else is willing to pay for it... in my case there are 4 people willing to pay that within 3 market days. Your right, if cash buyer this is a moot point. Also, I had to take this offer as we had multiple offers and could only hold them for an acceptable amount of time. If we could leave on the market longer maybe a cash buyer would have offered ina few days or weeks, but we'll nevet know unless this deal falls through.

You also confirmed a good point... the appraiser works for the lender so they will try to lower it as much as possible for the lenders benefit. I wish there was more of an impartial middle man determining value.

This is patently false. I can't tell you how wrong you are on this point.
RK
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Quote:

You also confirmed a good point... the appraiser works for the lender so they will try to lower it as much as possible for the lenders benefit. I wish there was more of an impartial middle man determining value.
what benefit would this have to the lender? artificially suppressing the appraisal value would potentially kill the deal and would definitely reduce the amount the bank could lend.
aggie appraiser
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jpb1999 said:

I see your argument and understand the lender holds the power, but that doesn't change the market determined value. Something is only worth what someone else is willing to pay for it... in my case there are 4 people willing to pay that within 3 market days. Your right, if cash buyer this is a moot point. Also, I had to take this offer as we had multiple offers and could only hold them for an acceptable amount of time. If we could leave on the market longer maybe a cash buyer would have offered ina few days or weeks, but we'll nevet know unless this deal falls through.



It absolutely changes the market value. If someone doesn't have the financial ability to make the deal happen, it isn't the market value. It's the wishful thinking of someone who can't afford it.

Just because someone makes an emotional decision to purchase (or overpay) for something, doesn't make it the market value. On the other hand, if they do have the cash on hand to assure the lender that their risk is mitigated, then sure.

The mistake you are making is accepting the premise that you have a willing buyer, therefore, you have established the market value. No, that is not correct. They have to have the money to pay for it or the ability to get it financed and closed.

If someone is offering above your list price (likely above what your realtor thinks the property is worth), it is a good idea to make sure they have the cash to close if it doesn't appraise for the full amount. Put it in the contract.

Quote:

You also confirmed a good point... the appraiser works for the lender so they will try to lower it as much as possible for the lenders benefit. I wish there was more of an impartial middle man determining value.


There is no need for me to confirm that the appraiser works for the lender. It is a well known fact. Our client is the lender. There is no mystery about it. They are the one putting up the money. If you would like your own personal appraisal, where you are the client, you can do that. However, lenders will not accept it for lending purposes.

The rest of your statement is completely wrong. The appraiser isn't trying to lower the value and isn't supposed to be an advocate for anyone in the transaction. The appraiser is required to be neutral and unbiased. The appraiser IS the impartial middle man who determines the value.
Shooter McGavin
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AG
aggie appraiser said:

jpb1999 said:

I see your argument and understand the lender holds the power, but that doesn't change the market determined value. Something is only worth what someone else is willing to pay for it... in my case there are 4 people willing to pay that within 3 market days. Your right, if cash buyer this is a moot point. Also, I had to take this offer as we had multiple offers and could only hold them for an acceptable amount of time. If we could leave on the market longer maybe a cash buyer would have offered ina few days or weeks, but we'll nevet know unless this deal falls through.



It absolutely changes the market value. If someone doesn't have the financial ability to make the deal happen, it isn't the market value. It's the wishful thinking of someone who can't afford it.

Just because someone makes an emotional decision to purchase (or overpay) for something, doesn't make it the market value. On the other hand, if they do have the cash on hand to assure the lender that their risk is mitigated, then sure.

The mistake you are making is accepting the premise that you have a willing buyer, therefore, you have established the market value. No, that is not correct. They have to have the money to pay for it or the ability to get it financed and closed.

If someone is offering above your list price (likely above what your realtor thinks the property is worth), it is a good idea to make sure they have the cash to close if it doesn't appraise for the full amount. Put it in the contract.

Quote:

You also confirmed a good point... the appraiser works for the lender so they will try to lower it as much as possible for the lenders benefit. I wish there was more of an impartial middle man determining value.


There is no need for me to confirm that the appraiser works for the lender. It is a well known fact. Our client is the lender. There is no mystery about it. They are the one putting up the money. If you would like your own personal appraisal, where you are the client, you can do that. However, lenders will not accept it for lending purposes.

The rest of your statement is completely wrong. The appraiser isn't trying to lower the value and isn't supposed to be an advocate for anyone in the transaction. The appraiser is required to be neutral and unbiased. The appraiser IS the impartial middle man who determines the value.
Nicely done. Kudos
dcAg
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Go to the appraisal district's website and see if you can find the sales prices of comps in the area.
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