Last week, a major regional builder experienced an appraisal evaluation for a property they just completed construction on and was prepared to close. The buyer and the builder had come to terms on a sales price near $400,000 before construction began. The evaluation report generated by a local appraiser came back under the agreed upon sale price. In a panic, the lender for the buyer, the agent for the buyer, the buyers themselves as well as representatives for the builder began to scramble on how to address the current circumstance.
To further explain the details, the home was located in a community specific to this regional builder. There had been numerous other sales in that community over the past 9 months, however, none of the sales were near the agreed purchase price of the property in question. The buyers had obtained financing from a large regional bank here in Cincinnati, and had been approved for a 20% down conventional style loan package offering an amazing interest rate with zero PMI. The buyer and seller had come to terms 6 months ago, and through the selection process the buyers added upwards of $13,000 to the original purchase price of $386,000. All parties were made aware and committed in writing of this price adjustment before construction was underway. During the construction period, a preliminary appraisal was ordered which is a common occurrence for a new construction home. The appraisal was done noting a sale price of $386,000 and months later the final appraisal was ordered noting line items of upgrades the buyers selected at their selection meeting months before. The preliminary appraisal was submitted at a value of $386,000 then weeks prior to closing, what can be considered a final appraisal was ordered. To admit neglect, the appraiser did not receive the notice of final appraisal weeks prior to closing. The reason for this was explained to us as the appraiser had turned off his notifications from the 3rd party company working between the lender and appraiser. Upon notification that the final appraisal was needed the appraiser explained “there are zero comps to build a value of $398,465 within the area; it can’t be done.” This opened the door of total chaos. The buyers were devastated and lost as to what to do. Both the lender and builder’s representatives were shocked that a new construction home did not appraise for the agreed upon sales price. I was torn as well, having closed several new construction properties over the past 18 months and having no appraisal issues to note. In my experience, however, I knew the proper ways to approach such a scenario having dealt with this 3 times over the past year on resale properties.
My first stop was with the lender to immediately inquire about options, policy and procedures in handling this from the perspective of my client’s loan package. While those wheels were turning, conversations with comforting my clients began. They were on the exact other side of this scenario while selling their home this past spring. Realizing the stress people put on themselves during the process of building a home, my focus was still on their future: keeping them focused on what a beautiful home they built and how amazing it will be the day they unlock the front door for the first time. Then we had to discuss our approach.
During the discussion with my clients, I also started note sharing with the builder’s representatives, making certain the line of communication was wide open. My focus with the builder was simple, “We don’t care who is to blame here; we just want a solution.” There were a few I thought of right away. The seller could provide comps in the community that could submitted to the appraiser for review with data to support the purchase terms. The builder was unable to provide this because there was none to provide. I did my homework, studied each home sale in comparison only to discover the subject property was the biggest and best the community had constructed and completed since early 2008. Supplying comps was out, so the other solution was to order a new appraisal, however, the lender killed that by noting the loan package didn’t allow for that option. So here we were looking at a home that appraised for $13,000 less than the sales price with seemingly nowhere to go.
My buyers had the funds to cover 20% of $398,465 as months of planning put them in that position. However with a lower appraisal, it put the loan to value ratio at a different position, placing PMI back into the conversation. My clients were not able to swallow PMI; in fact they were against even furthering those discussions. So we were now looking at the $13,000 in upgrades my clients had selected to be installed in the home as being the difference and deal breaker in this closing.
Late in the night on Thursday–12 hours from closing–the builder’s representatives and I had at-length conversations, discussing positioning for solutions. The builder made me aware that several channels of people needed to review the on-hand documentation, appraisal and purchase contract included. I was told after over an hour of deliberation, that mid-morning on Friday would be the earliest time to continue our negotiations.
Mid-morning Friday, my negotiations with the builder started again. This time they took the stern position of “this is not our problem and we are not budging.” I was really taken aback, by no means is this my client’s problem either. I knew the appraisal was a direct opinion of the value of the home, the home the builder owned. It was made known to me that the lender had discussed options to close the loan with the appraisal we had, and instructions on how was delivered to the builder. At this time, the builder knew the financial status of my clients, taking nearly every bit of leverage away. The buyers just wanted to close with the loan package they had prepared for and sales price to which they had agreed. That was not going to be the case.
Friday afternoon my negotiations hit a fevered pitch. I was strong and precise at painting the picture to the builder. “What are you going to do with this $13,000?” My clients don’t have an extra $13,000 to bring to closing–which is exactly what the builder demanded. If they want the house, they must pay us what we agreed to. I went on to ask “what would you do if your buyer didn’t have the $13,000 to bring?” This is the response I got, “we would send your buyers a default letter. That letter would explain we would be keeping the $19,000 they put down in earnest money and then we would put house up for sale.” As unreal and unfair as that all sounds, that was exactly what they were going to do with the beautiful home my clients built IF the sale price of $398,465 was not provided in full.
My clients were devastated that the builder they chose was being so demanding with a situation my clients didn’t cause. Offering no peace of mind, no security, no direction; rather, they would be setting demands, holding a defensive position, not taking any responsibility and pushing my clients to a very emotional state of mind. Our lender in the process then raised a hand at being helpful, introducing a new loan package which required some upfront cost to remove PMI from the package which we were able to negotiate the builder to pay. The explanation of the loan package really made me wonder what really goes on behind the scenes at regional lending institutions. It was described the numbers would work; the system would be blind to the missing $13,000 for the appraisal, all because my clients had 20% of the higher number to put down. Even with the lower than sales price appraisal, the down payment was somehow turned around sideways and then placed on paper to look like nothing had changed. Believe this story or not, that is exactly what happened, the loan was re-disclosed, GFE was generated and closing took place without manipulating the contract or loan package.
The fact that is still evident here is this, my clients now know they built a home with a well-known builder in our region and came to terms on value when the opinion of fair market value is $13,000 less than what they actually paid for it. This asks the question, how healthy is new construction right now? Are builders overbuilding? Are buyers overspending? Are appraisers overlooking? And finally, are lenders overstepping the bounds that good faith lending has created?
My clients felt let down by their builder, bruised by the financial system, torn by the current events of the real estate world. I recall my buyer asking me, “Do you deal with this everyday in your career?” and of course, “sometimes, some days, certain situations put me in a position to negotiate with or without leverage for my clients.” I realize that moments like these are the reasons why I have become so good at helping people. My clients needed solutions, and the solutions I had in this case, the builder chose not to see them as acceptable.
We worked smart to establish communication, deliver and draft solutions, and finally 3 business days later, my clients go the keys to their new home. I created positive thoughts to the final outcome, however the steps to get there are moments I don’t choose to give energy too. This circumstance only grew worse based on the techniques and delivery of the parties involved. We couldn’t control the circumstance, but you can control how you handle it!
