A Common Problem in Hoboken Real Estate Sales
Here is a situation that has been popping up recently. A Hoboken property gets listed for a certain price, let’s say $700,000 for the sake of simplicity. It’s a really nice condo in a great location with 3 big bedrooms, some wonderful features, maybe a yard or nice terrace or a view of the city. Buyer comes along, then another, finally several buyers make offers (it happens more than you realize, even today). The price goes over asking – a buyer wins the bid and $730,000 is the purchase price. The buyer plans to put down 20% and finance the balance of the purchase price. We get through attorney review with no issues and the buyer applies for his mortgage.
The bank orders an appraisal. The appraiser has very specific rules about what can be considered in determining value. The comparable sales do not support the purchase price. The appraisal comes in at only $650,000. Now what??? This if the fun part – not.
- The buyer and seller could re-negotiate the purchase price. This seems like the sensible thing to do. But you must consider – is appraised value truly the same thing as market value? Some would argue it is not. Others would argue it is a very conservative measure used by the bank to limit their risk.
- The buyer typically has a clause in the sales contract called the mortgage contingency clause. It says that if after making a good faith effort the buyer cannot get a loan, the contract is void. If the property does not appraise and the buyer won’t put more money down, the loan likely won’t be made and he or she can walk away from the deal. This never makes the seller happy.
- The seller can demand that the buyer put more money down and obtain a smaller loan so the buyer remains within the bank’s loan-to-value ratio. If the buyer really wants that particular property, the buyer might agree.
In the past few months I had one deal where I was the listing agent and the property did not appraise. The buyer and seller renegotiated. (The sellers had little choice as they were in contract to buy a new home themselves and didn’t want to lose that property). This was one of those multiple-offer situations. I honestly believe that the buyer bid high knowing in the back of his head that if the appraisal came in low, he would back off his offered price. It was not a pretty scene.
I recently was involved in another deal where I was working with a buyer interested in a high-end property. Again, there were multiple offers. My buyer made a full-price offer even though we all knew that the appraisal was going to be an issue from the start. The buyer wanted the deal to be contingent on the appraisal. The seller wouldn’t hear of it. The deal fell apart. Of course, any other buyer who is interested in that property is going to have the same concern and the seller is going to be right back in the same situation. I guess there may be buyers out there who don’t care that the appraisal is low. Maybe they are paying all cash and never plan to sell or think the market will recover sufficiently before they do sell so that it won’t matter. Most buyers are going to be very nervous and have second thoughts when they are setting prices at the upper limit and then get that low appraisal.
Finally, there is the complication of short sales, foreclosures, desperate sellers and seller’s concessions. All of these cause low sales prices. Those closed sales become the comps that will be used in appraisals of similar properties. If you are buying (or selling) in a building like the SkyClub, where there have been a number of short sales, it’s difficult to support a high price with the comps. For an interesting debate on the subject of whom is to blame – the realtors who pushed for high prices during the boom, or the appraisers who now take the blame for low appraisals that keep sales prices down, you might enjoy this thread. Even with all the new regulations, the problem is not going away any time soon.