By: Ilyce Glink and Samuel Tamkin
Q: First, thank you for your radio show. I listen to it as often as possible. I am in the process of buying a home listed for $180,000.
We negotiated and signed a contract to buy the home for $178,000 with the seller paying $2,000 in closing costs. The appraisal came in at $170,000. I came back and offered the seller $170,000. They initially refused to budge from the contract price but came back and lowered their price to $174,000 and included some furniture and other items. They also want my Realtor to reduce her commission by one percentage point.
Why would I pay over the appraised value? I really want this house but was all set to walk away before their latest offer I think it’s ridiculous that they are attempting to reduce my real estate agent’s commission (that should be up to the agent).
Am I being realistic? I would love your advice.
A: The appraiser that came and looked at the home you are buying determined that the appraised value of the home is $170,000. That appraiser may be right or his or her appraisal or could be off. It’s an art, not a science, and therein lies the problem.
The appraiser looked at similar homes or homes with different features and recent sales to come up with the appraised value. If the appraiser is right, the question for you to answer is what rights you have under the contract to get out of the deal if the home does not appraise. If you can cancel the deal, you can walk without a financial penalty.
Now you also indicate that you really love the home. The seller can’t be forced to agree to come down to the value given by the appraisal. The seller can wait and get another buyer or can meet your demand. Given this situation and the impasse you now face, your seller has suggested having your real estate agent cut his or her commission.
You’re right. Whether your agent decides to take a cut is up to your agent. You should tell your agent about the offer, unless your agent already knows. Then your agent can decide if he or she is willing to reduce the commission to get the deal done. Some agents would never agree while others would prefer to give up some of the commission to get the deal done than start the process all over again. But that decision must be left to your agent.
In some situations, a buyer’s real estate agent will only reduce the buy side commission if the seller’s agent takes an equal hit. Perhaps the seller is asking both sides to cut their commission to make the deal. It appears that you are about $4,000 apart (maybe around $3,000 given the items of personal property that the seller is willing to throw into the deal). One percent of the purchase price of $174,000 is $1,740. If both agents are each forced to pitch in one percent, the seller will pay $3,480 less to the brokers in commissions.
The seller is trying to keep the proceeds from the sale as close to the same amount he would receive if the sales price had stayed at $180,000. You should have a conversation with your real estate agent about this property, anything the broker knows that might affect your decision whether you should proceed with the purchase or back out, and if the agent is willing to cut the commission.
It’s a tough market right now. If there aren’t any other homes you want to buy, then you might want to work out a deal for this property. If there are dozens of other homes for you to consider, then walk away.
Finally, you must consider your lender. If the appraiser says the property is only worth $170,000, the lender will only lend you money based on that amount. Even if you decide to go forward, the lender will consider the lower number when approving your loan. Do you have the cash to make up the difference? If you need every penny you can get from the lender to close on the home, the lower appraisal value means you’ll be short at the closing.
Finally, there are times you can go to the lender and have them send a message to the appraiser to reevaluate the appraisal or simply get a new real estate appraisal. However, if you get a new appraisal or get the original appraiser to redo the appraisal and now get the price you seek, you still have to wonder whether the appraiser’s first indication of the value of the home was right or whether the appraiser missed the boat in giving the appraisal.
Appraisers have guidelines they must follow in writing up the appraisal. During the boom years, buyers were upset if appraisers didn’t value properties high enough. As the market declined, buyers were upset that appraisers found the prices for homes to be too low. It’s hard to make everyone happy.
But the point of an appraisal is to help the lender determine whether property values are way out of the norm for an area. It’s a second set of eyes. And, when the appraised value is out of whack with market “demand,” you have to wonder why.
But the ultimate decision on whether to move forward with the deal is still your decision and, to the extent your broker is asked to pitch in, it’s up to your real estate agent as well.