How an appraisal almost cost me my dream house
In my neighborhood, houses move fast. I remember countless times pulling up to a house, having just missed the Saturday open house, and thinking I’d have time to see it tomorrow or the next week. Instead, I’d go online and check Zillow the following morning only to see that the house was listed as contingent. I learned from these disappointments that I needed to make a deal within a day or two of a house going up or it’d be gone.
One Saturday in late November, I saw a three-story condo on Zillow and I immediately fell in love with it. It had a unique arch doorway, a large bay window, and enough bedrooms for my partner and I to both work from home without wanting to kill each other when our meetings overlapped. Seriously - try having two Zoom meetings at the same time in a cramped one bedroom apartment.
I had just missed the Saturday open house (typical) and with the unique character of this home I knew I wouldn’t have long. I texted my real estate agent right before 5pm that night and we saw it the next day at noon. To make an official offer, I needed lender pre-approval so we worked tirelessly that day to get all the paperwork done and offer sent by 7:30PM, asking the seller’s agent to wait for us. Normally, this paperwork should be done ahead of looking at house, but I wasn’t expecting to buy a house for the next two to three months. I just can’t seem to keep myself from Zillow window-shopping!
Ignoring red flags (hello, college dating)
When my real estate agent looked at comparable houses to find out how much we should offer, she sounded concerned. A corner unit in the same neighborhood that was semi-updated had just sold for $253,000 six months prior while another outdated unit sold in the $230s a year and a half earlier. This house was not a corner unit and it lacked updates, but it was listed for $265,000 - it’s sales price just two years ago was $40,000 less at $225,000. This essentially meant that the seller was asking for an 8.5% yearly return on a condo (which usually only goes up 3%) all without making any improvements!
What I imagine my real estate agent and I looked like when we asked the seller’s agent to justify the ask price…
I didn’t want to be taken advantage of certainly, but I also didn’t want to miss out on this home. I had run the numbers for my personal budget and it was the perfect place to live and later to rent. I had to have this house.
Digging into the details, we found out the sellers were young, had been hit with a $5,000 HOA assessment for later improvements, a $5,000 A/C replacement, and a few other smaller repairs. The inspection turned up damages of at least another $10,000 (cracked bath tub floor that could leak, carpet/floor replacement needed across two of the three levels, 99% of windows fogged from broken seal and needing glass replacement) before even considering the costs to modernize anything. Oh - and the HOA had just raised their monthly dues roughly $30/month!
Couple this with 6% of the sales price for realtor fees paid by the seller and any closing cost credits and the sellers were seeming to lose money overall (which shouldn’t be a shock if you buy and sell too early). It seemed apparent to me that they were desperate to recoup their lost money and I ultimately offered $256,000 ($9,000 below the ask price), allowing the sellers to breakeven or just barely lose money. When they countered with $260,000, we stood our ground, citing appraisal concerns.
They accepted the next morning!
The problem with over-offering
My investment property purchased in March of 2020 was a new construction and so I had never been through the ins and outs of bidding wars or appraisals before. My real estate agent explained to me that if we offered more than the home was worth, and the value that came up during appraisal ended up being lower than what we offered, someone (the buyer, seller, or a combination of the two) would have to make up the difference in price in cash before closing. A lender won’t let you borrow for more than the home is worth (and sometimes won’t even let you give extra cash to make up the difference).
All-in-all, I thought we might be off $3,000 or less, but if each the seller and I were willing to meet in the middle, the deal was solid. “I can afford $1,500 to meet in the middle, and I can afford the full $3,000 difference if they’re stubborn”, I thought.
Appraisal day (& ignoring more red flags)
You don’t get to choose the appraiser. You pay the lender ($485 in my case) who hires an appraiser for you so that it’s independent and unbiased of what the seller, buyer, or even lender wants.
I remember the appraiser emailing me directly and asking me about the house - asking me when I would be free to meet there, where the home was listed, etc. I was confused because I hadn’t realized that I needed to schedule time to be at the appraisal and had already suddenly taken off for the inspection, angering my boss. I emailed my real estate agent who informed me that she really shouldn’t have contacted me and that she should be scheduling through the “appointment center” - whatever that is.
I tried to give my real estate agent her number, but realized it had two extra digits listed. I asked the appraiser for her number, pointing out the error, and she ignored my email and continued a one-side conversation with herself, eventually arriving at her own answer and disappearing from my inbox for the remainder of all time. I worried about her professionalism, but was along for the ride at this point.
The true value of the home
After what felt like an eternity later, the appraisal was done and I heard back the following Friday at 8pm. The house came in at $250,000, $6,000 below what I had offered! I couldn’t sleep that night (my boyfriend actually told me that he wished they hadn’t sent the e-mail until the morning). At 24 years old and offering 10% down, I didn’t have the cash to make up the whole $6,000 difference, which was twice my worst case, affordable scenario of $3,000. I had a feeling that the sellers, who acted tight on cash and had lost enough money already, felt the same.
Negotiations & waiting
We emailed the other real estate agent with “urgent” in the subject line and asked them to come down the the value of the house. She shot back “Weird, we had a cash offer for more than that so I’m not sure what the sellers will want to do”. My heart dropped. I had already paid the $1,000 due diligence, $485 in appraisal fees, and $685 in inspection fees, none of which are refundable. I didn’t want to lose the home over $6,000 if they were unwilling to negotiate and hoping to return to the cash buyer if my financing fell through.
We messaged them a commitment letter from the lender in response and reminded them that we were likely the only option to close by the end of the month (and thus not pay the costs of holding the home through another mortgage and HOA payment). From there it was radio silence for three days while the clock ticked on my closing date and rate-lock. My $3,000 earnest money would also become non-refundable within a week, adding to my sunk costs.
I nervously paced in circles around the awkwardly placed wall in our rented one-bedroom apartment all Sunday morning before sending my real estate agent a text at noon, “Is it normal for them to take this long with such a tight deadline (two weeks to close, one to get all final documents submitted)? Why aren’t they even trying to negotiate?”
Challenging an appraisal
It turns out that the other agent and the sellers were finding major errors in the appraisal report. The appraiser gave extra value to a home that was a 4 bedroom whereas this one was a 3 bedroom - come to find out, it had the same floor plan of the 4 bedroom and was just missing the wall! The value of an added bedroom could result in thousands added back on the value.
Challenging the appraisal or worse, paying for a new one, could take a significant amount of time, though. My rate was locked in only until the 28th, so any date past that would cost me a minimum of $288 for every 7 days of extension needed and my earnest money of $3,000 would become non-refundable within a week. We considered negotiating to move forward without challenging, but ultimately decided that closing the gap on $6,000 outweighed the cost of a $288 extension. The sellers’ agent submitted a request on Monday by noon and then we waited. Three more days of silence.
Though the agent changed comparable properties and readjusted the square footage of the home, she ultimately didn’t change the value of the property. Disappointed but accepting defeat, the sellers and I finally agreed to meet in the middle (after some unsuccessful negotiating on my end to pay only 1/3 of the difference).
Home deal saved! It may not have been the most ideal process, but I learned a lot and hope sharing it with you lets you know what could happen if you decide to over-offer on YOUR dream home.
Keep coming back for details on renovations, repair costs, and how this property fits into my FIRE plan!
In summary…
Don’t over-offer unless you’re willing to fork over at least half the cash difference between the offered price nearby sales prices. The seller may not be willing to budge at all, in which case you’ll be out the house or out the full difference.