New Construction Build Appraisal Low

[Anthony Bonafide]

I am looking to start my real estate investment career by moving into a new home and renting my current home. However, I have run into an interesting situation with a new construction builder builder at the final stages of the process. I am about a month from closing(according to the sales team's estimate) and I have been proactively in contact with their preferred lender regarding interest, cash at close, closing date etc. They have not been too helpful with giving any of that information, and have not been responding too promptly. Recently, a sales agent for the builder called my partner and asked if we could bring an additional $50,000 to closing and that we would be closing in 3 weeks. These additional funds are being added on top of what we already were told. The sales agent stated that reason for us needing the additional funds is do to the third party appraisal coming in lower and the lender will not loan the original amount. Which all makes sense. However, they stated that the reason it appraised lower is because there are no comps in the neighborhood. They are pressuring us to commiting to bringing the money and stating that they must know and they will not hold the house for us.

Here is some information about the area, property and finances. The home base price was $450,000 with a $20,000 lot fee. We have upgraded the house to a final price of $572,000. We put down an initial deposit of $20,000 and after upgrades we gave a percentage of the upgrades in cash to the builder at $24,000. The loan officer stated we only need to bring ~$5,000 to close and provided documents. I asked if they can provide other options to pay more at closing and bring down the interest (2.99) simply because I like options and I have some additional money. They never responded and then we received that phone call. The home is a ~3,600 square foot home with 5 bed 4.5 bath. The neighborhood is not new and has been around for at least 5 years that I am aware of, and there are properties that seem to be comparable. For example 5 bed 3bath 3,200 square feet, or 4 bed 5bath 3,500 square feet all in the same sub division. However, the home we are purchasing is in a group of homes that are the first in this smaller area within the subdivision. It is a 3 min walk to other builders' in the same subdivision

I am just getting into real estate and investing and wondering if:

1. What they are saying about the appraisal is true?

2. What does that mean for the property and the value after if we closed?

Any comments and advice would be much appreciated.

[Scott Krone]

@Anthony Bonafide - to be clear.  The builder is not charging you more than what was agreed upon.  The lender for the acquisition has been arranged by the builder.  The lender hired an appraiser to obtain the appraisal for the loan.  The loan is for "X%" of the contract price or appraised value.  The agreed upon price is $572,000 and you have $44,000 in deposit and expected to pay another $5,000 for closing costs.  So, if I understand this correctly, you assumed a loan of 92%.  But because the appraisal came in $50,000 lower ($522k) you have to close the gap.  Is this correct?

A few thoughts if those assumptions above are correct.  There is $102,000 in upgrades.  The builder would not have promoted the lender if they couldn't finance the "basic" package.  The lender would not have selected appraisers who would not support the "basic" package.  A loan of 92% is a high debt to loan value.

Options after requesting to see the appraisal:

1.  new lender new appraiser

2.  contest the appraisal by reviewing the comps and seeing if there are better ones, or if the assumptions the appraiser made are correct.

3.  ask the lender to compare the appraisal to other homes in the subdivision

4.  contest the upgrades with the seller based upon the fact they appraised at 50% of the amount charged.

5.  Pay the $50,000 at closing, move in and enjoy the home.

What are they saying about the appraisal is true:  Only can be determined if they show you the appraisal.  See if the comps are accurate.

What does this mean for the property value:  Maybe nothing.  When a bank (NOT THE BUILDER) requests more equity it is because they don't feel secure, and they are "hedging their bet".  The bet is if they have to foreclose will they be able to sell it at or above the loan value.  The lower the loan, the more security they have.  It is strange for the builder/agent for the builder to be communicating to you what the lender requires rather than you talking directly to the bank.  I would call the lender directly and ask for the appraisal, then base my decision upon that.