It was a beautiful sunny afternoon, and one of the buyers suggested I meet at a new venue, since the Dunhill and Matt’s Chicago Dog have had more than their fair share of advertising in this blog. What better place than Ri Ra’s Irish Pub, a great place to have a few beers, seep in the ambiance of Uptown, and talk about the drama at the VUE Charlotte. We covered a lot of ground in this meeting, but the most eye-opening to me was comprehending for the first time the immense importance and the potential impact appraisals will have on the pre-sales buyers and their ability to close. After I understood the concepts fully, I left the bar thinking, for the majority of buyers, if appraisals don’t come in at the contract price, there may very well be more people than I ever thought that will have NO WAY IN.
We are going to get into some number crunching here, so please bear with me.
Let’s take a hypothetical unit with a contract price of $700,000. On this unit there would have been a 15% down payment, or $105,000. This leaves $595,000 that is owed at closing. You are off to the bank to see how much of the $595,000 you can borrow.
In comes the appraiser. The appraiser ambles through your unit and decides that it appraises at, for round number’s sake, $500,000. (this is almost 30% below contract price, not unrealistic given the set of appraisals that have been reported to me, but certainly at the more extreme end).
Here is the impact of this hypothetical appraisal. You go to Bank of America, and they tell you your unit appraised at $500,000, so you need to make a 20% down payment of $100,000, and they will finance the rest, which is $400,000. So to put this another way, you went to the bank and wanted to see how much of the $595,000 you could borrow, and you got your answer, $400,000.
Now go back to the beginning. The VUE needs $595,000. The bank gave you $400,000. You need $195,000 to close. Does this $700,000 condo buyer have an additional $195,000 of cash in the bank to close on this unit? Highly unlikely in my opinion.
Had the appraisal come in at the contract price, you would only have needed an additional 5% to get your down payment to 20%, or $35,000, because the bank would have given you 80% of the contract price, or $560,000. So instead of needing $35,000 to close, you now need $195,000. That feels like a showstopper to me. That feels like it moves this buyer into a “would love to close” to now a “no way I can close” category.
Let’s take one more example, a $400,000 unit that you put a 10% deposit down, or $40,000. You need $360,000 to close on this unit. You go to the bank for the money, they send out an appraiser, and it comes back 20% less, or $320,000. The bank will give you 80% of the $320,000, or $256,000. You need $360,000, the bank gives you $256,000, you now need to come up with $104,000 at closing (360-256). How many buyers of $400,000 condos have $104,000 cash in the bank to make this transaction work? I fear not very many.
This is why we heard the phrase early on : appraisal after appraisal. If the appraisals don’t come in very close to contract price, the cash needed by buyers to make up the deficit will be in many cases insurmountable. And I have heard numbers in appraisals near the 40% of contract price range (again, I think this will be the extreme end based on information received so far).
How many of the pre-sales buyers have the means to overcome these appraisals even if they wanted to? This is the problem with these early appraisals coming in so low, and it puts the project at grave risk. This is why if we continue to see these appraisals come in at significant percentages below contract price, MCL will have probably one of the most painful financial decisions to make in the history of their firm.
I feel my pain; I feel other pre-sales buyers’ pain; but I also now really feel MCL’s pain. But until MCL makes this excruciating decision to move their prices to what their being appraised at, the beautiful building could remain empty, and the cost of operating it with few owners will be unsustainable. I know they may have some legal means to fill some of the units, but we have to get the building substantially filled, not just a unit here and a unit there for it to be a success.
So let’s go on the optimistic assumption that every single one of us wants to close, but we can’t because of the appraisals. The appraisals either have to come up or the prices have to come down. Otherwise, there is as I said before, no way in. Personally, I don’t see how in this market that the appraisals can come up. The only way an appraiser could ethically justify this happening is if buyers without pre-sales commitments come in and buy units at prices similar to what the pre-sales buyers contracted for.
If the above doesn’t happen, that leaves the only the second option which is for prices to come down. Make no mistake the devastating consequences for MCL and for Dan McLean who allegedly has a personal guarantee on the project. That is why we may not see this happen until every other option is attempted. And maybe there are some creative options for MCL to try. If so, we’ll probably need to hear what they are soon. I truly hope they have some.
I want the project to succeed. Uptown does, MCL does, pre-sales buyers do, the real estate community does, and I think all our readers do. But these are the obstacles that I see, and they are formidable.
This is just my opinion. What do you all think? Please share in a comment or write to Vuebuyer10@yahoo.com.