Roofstock Property Purchase: A Note on Appraisals
The appraisal does not necessarily reflect actual value, it just reflects current condition of the property and what the surrounding similar properties are going for. If an area is about to get really hot, it will require buyers going above appraisal to get into that market, which in turn raises the appraisals, and the cycle continues. It is not necessarily the best idea to be the first person to cross that line and "overpay", although it may be worth it if you think that the potential appreciation far outweighs the amount you are overpaying. Another thing I did not know before this process was that the appraisal limits the amount of the asset that the bank will cover. In my case, that means that now the loan will only be for a max of $89k, regardless of whether or not the closing price drops from the original $115k or not.
A lower total price, duh!
The seller may realize that the evaluation will not change in the near term and knows that the same thing could happen with the next potential buyer or the buyer after that.
The drop in price also results in a reduction in principal and interest, which raises the profit margin and monthly income
May not be able to use my loan to leverage as much as I would have before, resulting in more initial investment
The appraisal coming in so much lower than the original asking price decreases the odds that the seller will agree to the lower price.
I am now calculating a maximum closing cost that I would be willing to accept taking this new loan amount into account. It's simply a numbers game with an optimal point at which there is a minimal initial investment and maximum monthly profit. On a personal note, it is really hard to even consider withdrawing the offer given all of the time and money I've already put towards getting this far, but it is important to never force a deal just because you have gotten through most of the closing process. It is imperative to take a step back and look at the deal objectively or you will just be signing up your valuable time for mediocre returns. You cannot lower your standards!
On a financial note, I have at most $945 to lose and will most likely be able to recoup $545 of that, so all in all losing $400 is much better than getting into a bad investment!
A few lessons from this:
Limit the amount of loses should the deal not close and make sure you have proper contingencies in place so that if a deal goes south, you can get out of it
Even if you have an appraisal/inspection contingency, if you believe that the appraisal will come in much lower than the asking price, it may not be worth going into the investment as it is probably unlikely that the seller will want to reduce the price enough. Make sure you think it is worth the possible loss of some funds to see if the seller will be willing to take the bait!