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4 Options If Your Home Is Valued Less Than Selling Price
While you happily celebrate finally able to sell your home at a high price, the buyer’s challenges are just starting. Other than the challenge of knocking some sense into themselves for buying an overpriced home, the immediate priority is to secure a mortgage for the purchase. These days with the property loan market being uncertain, every buyer should obtain an approval in principle loan before even starting to look at houses. You would also expect a buyer to have all the gaps covered if he is bold enough to purchase an expensive house.
But do you know that even if a bank grants a buyer a pre-approved loan at $1,000,000, it is not a given that he will be able to finalise it after signing off a contract to buy a house? The most common and detested reason is that the property is worth much less than what it is being transacting for. Let’s say a lender initially approved a loan of 80% loan to value up (LTV) to $1m. This means that the buyer can mathematically purchase a house with a value of $1.25m to fully max out the loan at $1m.
The footnote in fine print is that the LTV will be based on the valuation or purchase price, whichever is lower. This means that even if you indeed bought a house at $1.25m, you will only be eligible for $800,000 loan if the value of the property is $1,000,000. It also takes into account your income to support the purchase. And because real estate don’t transact at valuation as often as we think, financing for your buyer can become a deal breaking issue if your property has a valuation way lower than the agreed price.
1)Very often even if a purchase price is lower than an initial valuation, appraisers could find reasons to justify a higher value, provided the variance is a small one. But when the deviation is too big to turn a blind eye, this is when the buyer will get an earful from his wife. If the situation is reversed and purchase price is lower than value, there will be no issue as the lender will just issue the loan based on the lower transacting price.
So what can you do if the property you are selling is valued way lower than the agreed selling price? You typically have 4 options.
1) Request that the buyer top up that short fall with cash. This is a straight forward solution. But we are talking about a house here. And when these situations come up, the short fall is not a mere $20 you can dig out from your old pair of skinny jeans. A high cash portion up front can scare off any buyer no matter who he is.
But if we are to look at it from another angle, buyers are not stupid as well. There must be a reason why they are willing to purchase at your inflated price in the first place. And this reason is usually related to something emotional. Sometimes, a home just connects all the dots for a buyer. So a buyer who really wants your house will most likely ask that you lower the price and maybe meet somewhere in between.
Since you are under no obligation to reduce your price, the decision is entirely up to you. Because if the opposite happened and valuation is way above the agreed price, would you expect the buyer to voluntarily adjust the price upwards so as to guard your interest? You do hold a small advantage at this point as you would have already received the deposit which is forfeitable should the buyer fail to close.
Depending on the situation, if there are many other buyers trying to outbid each other for your property, you can hold firm on your price. But if that is the only buyer, the smart thing to do is meet somewhere in between if the general market is falling.
2) No matter how rich anyone is, who would turn down the chance to save a few thousand dollars on closing. Remember that the thing in your favour right now is that a contract to purchase has been agreed. The valuation situation also favours you more than the buyer. So by adjusting the agreed price lower to meet valuation, you are essentially taking a hit which the buyer would be grateful for. You are in effect, transferring your own profits into the pockets of the buyer. It would then be wise to request that the closing costs is borne by him.
The buyer’s concern at this stage is no longer on profitability. It is on his own ability to close. And buyers will be receptive to these suggestions as it digs them out of the hole in the ground. You might go for the home-run and ask for full coverage. Or ask for partial coverage. Again it depends on the situation and how much of a capitalist you want to present yourself as. But you must take a bite out of the pie if you are compromising on your final price. It is only fair this way and you get to get a little back in return for your generosity.
3) There are many lenders in any real estate market. And each lender have their own panel of appraisers they use for assessing property valuation. Since this is a process that relies heavily on human judgement, a property’s valuation can vary greatly between lender to lender and appraiser to appraiser. This is the green light to get an second, third, forth, or fifth opinion on the property value. If luck is on your side, the easy solution to the problem is just located next door.
4) If the elements are really not in your favour, the deal has very little chance of moving forward. Your buyer cannot afford your house. What can you do about that? Seller creative financing? Let’s not over complicate the matter. Cancel the deal and call up your agent to remarket the house. At least you have a useful forfeited deposit to spend on a lavish dinner.