Wednesday, March 16, 2016 / by Ken Couture
You have found the perfect home, with top-of-the-line appliances and finishings, a pool and exotic landscaping. The finished basement with home theatre is the envy of all your future neighbors (which they went out of their way to tell you at the open house). Your offer has been accepted, and it’s time to square up the financing.
Suddenly...roadblock. The appraisal comes in thousands less than your agreed-to price, and your bank will not finance one penny over the appraisal amount. How can this possibly happen?
According to Realtor.com, there are a number of reasons why your appraisal may not quite meet your expectations. Here are just a few of the potential reasons:
Local Comps: If the house next door was a foreclosure or part of a divorce fire sale, the appraiser may not look deep enough to discover the extenuating circumstances. If the house down the street was full of mold and had to be gutted, the appraiser likely won’t factor that in. The appraiser will simply look at a list of comps and choose the ones that seem to most closely reflect the size and features of your property. If there are low-ball comps in your area, they can and often do impact the appraisal.
Home Features: The features you fell in love with, like the basement, the pool, and the commercial grade kitchen, may not have the value you think they do. For instance, any below-grade improvements are factored much lower than improvements made to the above-grade structure. If the amenities and upgrades are too rich for the neighborhood, you likely won’t get the most value, either.
This is particularly sticky with condos, since there are multiple nearly identical units in the comp pool. If other improved units sold for less, then that information will be factored into the appraisal.
You Won the Bidding War: Just because the heated war with other buyers drove the price up, does not mean that your bank will be willing to loan you the amount you agreed to, especially if the appraisal does not support the price. You may have to cough up some additional down payment to cover the difference.
The Appraiser Gets it Wrong: While most appraisers have a lot of experience and are very skilled at making qualified appraisals, it is possible that the appraiser simply gets it wrong. You may have recourse with your bank to get a second opinion, but expect to have to foot the bill for the second appraisal, in most cases.
Working with a Buyer’s Agent is extremely important when you are searching for a new home. Your agent can help you evaluate whether the home you love is priced fairly given the comps and the upgrades/features. It may not completely eliminate the risk of surprise appraisals, but your agent has access to information and resources that can help you avoid this situation. Your agent may also have a list of preferred appraisal companies, to ensure you get the best, most qualified evaluation of your new home.
If you have questions about how home improvements might impact your market value or appraisal when you are ready to sell, call me. When you are ready to invest, buy, or sell, visit my website or call me direct, Ken Couture, 702-610-6247.