Purchasing a home in New York if it appraises for less than the price paid
By: Daniel Gershburg, Esq.
A client recently asked this question when he was considering whether or not to make an offer on a home that he liked. The short answer is no. Although there are certain issues to be cognizant of. In a typical home sale, be it in Brooklyn, or anywhere in New York, you will make an offer for a home and if it is accepted, you write up a contact and are now “In Contract” for the home. But what if your offer on the home was $500,000, and you needed a mortgage of $450,000? In order to obtain a mortgage of $450,000.00, the bank (your lender) would need to appraise the home and make sure that the $450,000 check they are going to cut you is backed up by a house thats actually worth $450,000 in their eyes. So lets say the bank looks at your dream home and they figure out that its actually worth $410,000 and so they are only willing to give you a mortgage in the amount of $410,000. Do you have to close on the home and make up the difference? No.
The above scenario is dealt with by a clause called a mortgage contingency clause which is standard in almost every Real Estate contract. The clause basically states that the purchasers have to make their best efforts to obtain a mortgage in a specific amount, and they have to typically try with three other banks to get the mortgage if they could not get the mortgage from their initial lender. Simplified, it means you have to try and get $450,000 from several banks before you can say “deals off” and get your deposit back. In the above scenario, its highly unlikely that Bank #3 would issue a mortgage for $450,000 if Bank #1 appraised it at $410,000. Its true that bank #3 will conduct its own appraisal, however the difference between the mortgage and appraisal amount is so high that its unlikely that another bank would find that the house is worth $40,000 more than what Bank 1 thought. The end result is that the deal is off and you receive your money back.
The second option, which is becoming prevelant in a buyers market, is to go back to the seller and say “Listen, nice one, but the house is worth $410,000 and not $450,000. So either drop the price so I can get a mortgage, or find the one person left in Brooklyn who has the cash to close on this deal.” At times the seller will reduce (usually the scenario doesn’t involve as a drastic of a price difference as I am using here), and at other times the seller will say goodbye to you and keep prodding along for a new purchaser who has the means to pay for the amount the seller is requesting.
In any case, you are protected should you decide to try and purchase a home that is worth less than what the seller thinks its worth.
Daniel Gershburg Esq., is a Bankruptcy & Real Estate attorney serving clients in Brooklyn, Queens, Manhattan, Staten Island, Long Island and Westchester. Mr. Gershburg has given lectures and presentations to both attorneys and the community at large surrounding Bankruptcy and financial advocacy in the New York City area. He is a proud member of the National Association of Consumer Advocates. Currently he is working on his first book giving practical advice about repairing troubled credit and how to improve credit post Bankruptcy