Curve Ball #2 – You are told, You Paid More than the Home is Worth.

You may have read the title and thought…Huh?  This is especially perplexing if you were in a multiple bid situation in which several potential ‘would be home buyers’ were vying for the same piece of property.  Surely, you, your REALTOR, the other agents and their clients couldn’t all have been totally off base?

You’re probably asking…Doesn’t the market dictate what a home is worth?

ANSWER:  Well, yes and no.  Depends on which market you’re referencing and who you’re talking to. The issue of market value is a little more nuanced than the negotiated number that a Seller and Buyer may choose to agree upon as the price for the home.

Here’s why.

If you are obtaining a mortgage for your home, the lender will order an appraisal on your behalf to ensure that the money they are loaning you is fully supported by the price you are paying for the home.  In a time in which the industry is under tremendous scrutiny due to the sub-prime mortgage crisis that nearly plunged all of us into a financial abyss, this process is taken very seriously.

An appraiser will use comparable properties which successfully retailed/closed in the recent past to determine what your home is likely worth on the current open market.  Under most circumstances, this process arrives at an accurate value.  However, there are situations where the evaluation may be compromised.  Here are a few to be aware of.

1. Transitioning Market.

You happen to be in a ‘Transitioning Market’; one in which values have recently increased significantly and/or rapidly.  However the past data does not support this trend yet.  In West Michigan, this is currently a challenge.  Many neighborhoods are seeing steady gains in prices but there have not been enough sales to fully document the trend.  Eventually, the stats will catch up, but in the meantime, you may also want to double check the opinion of the appraiser by reading reason #2.

2.  The appraiser may not be familiar with the area.

This does not necessarily mean they are incompetent.  It may simply mean that a nuance in the local environment may be obscured to an appraiser who does not routinely conduct appraisals in the vicinity.  In situations like this, your REALTOR may be able to provide the lender with additional comparable properties for consideration or you can ask for an Appraisal Review in which the original appraisal is double checked to ensure its accuracy.

If you find that you are told that you paid more for the home, you can use the appraisal, if it is correct to make an argument for negotiating a lower sales price based on what the lender will support in the loan value.  If a Seller is unwilling to lower the price of the home, you will have to fork up the difference in the sales price and what the lender is willing to loan if you determine that  you would like to move forward with the purchase.

Having an accurate assessment of value is critically important.  Paying more than a home is worth eats up your equity.  But, under-paying can also have an unintended consequence of artificially lowering the value of the community in which you are now vested.

Recommended Reading: Passing the Baton…Why a Home Closing Can Be a Beautiful Thing

Curve Ball #2 – When You’re told you paid More than your home is worth

*This is a series.  Check back for future updates.

Top 5 Ways to Avoid Panic When This Happens During Your Real Estate Transaction!

Real estate transactions can be harrowing ordeals for the uninformed, uninitiated and unprepared.  However, arming yourself with good information and an understanding of the process can go a long way towards diffusing potential disasters before they occur.  And, if you do find yourself in the situation, knowing the RIGHT thing to do can increase the chance that you will emerge with your dream home purchase intact.

1.  The Process may take longer than expected…

Yes, your contract may clearly state that you will be Closing your transaction on a particular date, but hidden in the fine print is an oft overlooked phrase which highlights reasons why a Closing can be delayed for upwards of weeks pending resolution.  In West Michigan, delays related to attempts to cure defects in title or survey issues or lender mandated repairs are a part of this list.  Details that many are prone to miss when engulfed with the thrall of an accepted purchase agreement.

A quick review of the above list shows that at least three different corporate entities can be the source of any of these delays.  If you scream, threaten or panic, you will simply add more fuel to the fire.  The good news is that these issues are often correctable with time and most Closings are able to eventually close without incident.

A Better Approach:

Don’t order your moving truck until you receive the ‘Clear to Close’ from your Lender and the Title Company.  Why add stress to your life?   It is unlikely that everyone in West Michigan will be moving on any given day.  You will be able to locate a truck.  And then there are always friends and family who can usually be counted on in a crunch.

Be flexible.  Relax.  Let the professionals go through their paces.  After all you are paying them to do their jobs.  Remember, they don’t get paid UNLESS you close the transaction successfully.

Keep in touch.  Not in an intrusive way, but simply let folks know that you appreciate what they are doing to help you and be willing to cooperate to the extent which this is possible.

Have a contingency plan with regards to your current living situation.  If you are renting, you may be able work with your landlord to do a ‘Month to Month’ lease.  Appreciate the fact that schedule changes are likely to impact a lot of people and anything you can do to limit pressure on yourself is useful.

Recommended Reading: Passing the Baton…Why a Home Closing Can Be a Beautiful Thing

*This is a series.  Check back for future updates.