An appraisal is an estimate of a property's value and is completed by an Appraiser. An appraisal can be a contingency of a purchase agreement if the buyer is obtaining a mortgage. Even if a buyer is paying cash, the buyer has the right to have the property appraised to ensure it is coming in at value.
Appraisals and home inspections are two different reports. Appraisers will look at the property value and base it on factors including location, structural condition, amenities of the home and recent sales of similar properties. In general, the location will most likely carry the most weight when an appraisal is being completed. Other factors to take into account when a home is being appraised, and if it does not come in at the contracted price, it may be a result of the home being overpriced, lacking permits and more. Nobody wants to overpay for a home, including a lender.
The following are a few reasons why a home may not appraise.
Overpriced
If a home is overpriced and goes under contract with an inflated price, the home will have to appraise (agreed upon price in the purchase agreement). I have had sellers tell me they don't care what the appraised value is, however they should! If a home 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.
Unpermitted Additions
If a home has obvious signs of additions that have not been permitted, then an Appraiser may not count that space in the living square footage. Appraisers need to utilize other "like" properties when preparing an appraisal.
Unpermitted rooms will not count in the overall 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. will not count in the square footage. As a homeowner, it is important to obtain necessary permits for any work done on the house.
Lot Size
Lot size square footage is another consideration. An Appraiser will consider the lot size, and other features as well such as if the home is on a corner lot. An appraiser will look at the size of the lot, location of the property, zoning of the property, and landscaping. The property will be appraised and it will be compared to other homes that have sold in the same neighborhood, and determine if it is a similar property or "like" property to the rest of the homes with regard to square footage, number of rooms and the size of the lot.
An Appraiser may make view adjustments depending upon the type of view the property has. 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 full view. There are neighborhoods which one side of the street may have full views, and the other side do not, those homes will not have equal 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.
Increasing Market
Another reason that 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.
Condition of Property
Maintaining a home is paramount 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 water leaks, there could be mold. An Appraisal will note that and most likely a lender will not lend on a home with mold.
If the home presents well and has obviously been maintained, that is preferable when a home is being appraised.
What if the Home Doesn't Appraise?
There are a few ways to approach it if the home does not appraise.
- The appraisal can be challenged. It is possible for a buyer to request their own copy and look for discrepancies. Ensure the property was compared to "like" properties. Also, review it for errors and check to see if there are any issues with permits.
1, Ask for a second appraisal. This is an additional buyer expense, and that needs to be taken into account. A second appraiser may have a different value than the first appraiser.
- 2. The buyer can ask the seller to lower their price to the appraised value. Sometimes a seller may consider this, it depends on how fall the appraisal is from the purchase price. There are also cases where the buyer may not have the funds to make up the difference.
- 3. The appraisal is generally a contingency of the purchase, and if the home does not appraise, then the buyer can utilize the low appraisal as an opportunity to cancel the sale.
- 4. Lastly, the buyer can cover the shortfall if they have the funds.
Preparation is key for an appraisal, and they need to be given access to all areas to accurately appraise the property including a detached garage.
It is important for the listing agent to make sure there are working smoke detectors and a carbon monoxide detectors in the property as it can be required in some states.
Final Thoughts
The listing agent and the home seller need to be prepared for a home appraisal. Generally speaking, it is preferred for the listing agent to be present and be able to discuss the amenities as to why the property has value such as corner lot, size of the lot, and recent upgrades in the geographic area are just a few to consider.
Find other resources about Appraisals from top bloggers across the country.
Common Issues with Appraisal via Kyle Hiscock, Rochester Real Estate Blog
Appraisal Myths via Bill Gassett, Maximum Real Estate Exposure
Who Hires the Home Appraiser? via Michelle Gibson, Wellington Home Team
How to Get a Mortgage via Luke Skar Madison Mortgage Guys
About the Author
The above article "Why Didn't Your House Appraise?" was written by Sharon Paxson of Newport Beach Real Estate. With combined experience since 2005 with buyers and sellers, we would love to share our knowledge and expertise and guide you through the home buying or selling process. If you would like to work with a Top Newport Beach Realtor, we welcome the opportunity to work with you. Contact us at 949-280-0681.
