When a home buyer is obtaining a mortgage to purchase a home, then the home will have to be appraised. What that means is the appraisal is ordered by the lender, and they will come out to view the home, measure the home, and will compare it to like properties in the area to determine the appraised price. This is a buyer expense. An appraisal is an estimate of the property’s value. An appraisal is generally a contingency of a residential purchase agreement. If a buyer is paying cash for a property, they can still have an appraisal contingency in the contract. The buyer has the right to have the property appraised to ensure it is coming in at purchase price.
Appraisals differ from home inspections. Appraisers will assess the property value which is based upon factors which include structural condition, location of the home, amenities of the home, upgrades in the home and recent sales of similar like properties. Generally speaking, the location of the home will carry the most weight with regards to determining property value. You have Realtors say it . . . .location, location, location! It is true, as the location of a home cannot be changed. Amenities and upgrades can be improved upon. There are other factors which appraisers take into account when determining value. If the appraisal does not come at the value on the purchase agreement, then the buyer may decide to walk. No one wants to overpay for a home including a lender! The following are reasons why a home may not appraise.
Adjustments for Lot
Lot size square footage is an important consideration with an appraisal. Appraisers will lot at the square footage of the lot,location, whether or not it is on a corner lot, or if it backs up to a busy street. All these things affect the value of the home. Other features that appraiser will consider is if the property has any type of view. If it is a waterfront home, then that particular feature will add value to the property. Other types of views include peek-a-boo views, ocean views, water view, city lights, canal, golf course, harbor or hills.
An appraiser may make view adjustments depending upon the type of view that exists. If a property has a peek-a-boo view of the golf course, city lights or ocean, then it will not compare to other homes with a panoramic ocean view. There are neighborhoods which one side of the street may have expansive views, and the other side do not. Those homes will not have comparable value if the views are not the same or comparable even though they are located in the same neighborhood. Homes that are waterfront may have a higher value generally speaking.
If a home has had upgrades or additions that have not been permitted, then the appraiser may not count that square footage in the living square feet. If a homeowner has a finished basement with a bedroom, bathroom, and they think by adding this, they have increased the square footage of the home, it is unlikely the appraiser will count this as living square feet.
Additionally, unpermitted rooms or sunrooms will not count in the living square footage of the home. An example may be is if a home has an enclosed patio that occupants are utilizing as a playroom, but is obviously an enclosed patio, this area will not count in the living square footage. It is fairly obvious to see that a patio has been enclosed if there is no HVAC to the rest of the home. As a homeowner, it is important to obtain necessary permits for any work done on the house. Additionally, homeowners need to disclose if they have done work on the property without permits.
Overpricing a Home
If a home has been overpriced and it subsequently gets an accepted offer with an inflated price, the home will have to appraise at the purchase price on the contract. Unless the price is not a factor, which it should be, the buyer should be paying the appraised value of the home. An experienced Realt
If the property does not appraise, then the buyer has the right to cancel the contract at no penalty to them if it is done inside their due diligence period.or will provide guidance to the buyer if they feel they are overpaying for a home.
If we are in an increasing market, the possibility exists that the appraisal will come in short. Appraisals can come in low is if the market is increasing and the recent sales have not caught up with the current market and purchase prices. Rising market values due to limited inventory along with few comparable sales.
Home prices increased as more buyers competed for fewer homes. An increasing market may be due to the low unemployment rate and the low costs of financing a home which means more people can afford to purchase a property.
Condition of Property
If the home has obvious signs of deferred maintenance, it is likely that will impact the value.
Maintaining a home is essential and ensuring that the condition is good will make a difference when it is time to sell a home. If a home has obvious signs of termite infestation, wood rot, stained ceilings, water leaks, or there could be signs of mold. An appraiser will note that and most likely a lender will not lend on a home with mold.
It is always in the seller’s best interest to maintain all aspects of the home. Deferred maintenance will show up on a home inspection, and it is likely the buyer will be renegotiating the purchase price if there are significant defects which need to be repaired.
What Happens if Appraisal Comes in Low?
There are a few approaches a seller can take if the home does not appraise at the purchase price.
- Ask for a second appraisal. The buyer would be paying for this, however, a new one may bring the property in at value.
- The appraisal can be challenged. Buyers should obtain their own copy of the report and closely inspect it for any discrepancies and errors which may exist. Look to see if there are any issues with permits.
- The buyer can request that the seller lower the price to the appraised value. A seller may consider this request, it depends on the difference between the appraised value and purchase price.
- The appraisal is a contingency of purchase, and if does not come in, the buyer can cancel.
- The seller may request that the buyer cover the shortfall if they have funds and agree to pay the additional funds.
Being prepared for an appraisal is paramount. The appraiser needs to be given access to all areas including the garage. If the property is a condo, having a key available to common areas is recommended as well.
The listing agent should make sure that the seller has installed working smoke detectors and carbon monoxide detectors. Properties are required to have operable smoke detectors and carbon monoxide detectors. Appraisers will take photos of these items for their reports. If the property does not have one, then the appraiser may have to come back out for a re-inspect and then an additional fee to do so!
Ideally, the appraisal comes in at purchase price, and then you don’t have to worry about these items. However, it is important for the listing agent and seller to be prepared for the appraisal. The listing agent should also be present and prepared to provide comps for the appraiser that they might not otherwise have seen. Additionally, the listing agent should highlight the features of the property which do add value.
Find Other Valuable Resources for “5 Reasons Your Home Did Not Appraise” from Real Estate Professionals. Please share on Social Media if you enjoyed the articles.
What are you going to do if the house doesn’t appraise? Michelle Gibson has written has an excellent article about options that you may have when an appraisal does not come in.
Have you ever been curious about what real estate appraisers look at when appraising a home? Bill Gassett sheds valuable information about what an appraiser will consider including square footage and more.
You will find detail information about the appraisal process from Paul Sian. He discusses the timing of an appraisal and what to do if it comes in below value!
About the Author
The above real estate article “5 Reasons Your Home Did Not Appraise” was written by Sharon Paxson of Newport Beach Real Estate. With combined experience since 2005 with representing sellers, buyers, landlords, and tenants, we welcome the opportunity to share our knowledge and expertise and guide you through your real estate transaction.
We service the coastal Orange County CA area including Corona del Mar, Huntington Beach, Laguna Beach, Newport Beach, Newport Coast, Sunset Beach, Tustin and more! If you are considering selling your home, we welcome the opportunity to work with you and list your home with a top Newport Beach CA Realtor.