For those thinking about getting into home ownership, one issue that many forget to consider until too late includes the home appraisal. Forgive me for my marketing blurb here, this issue also points to a great reason to utilize the assistance of a real estate agent.  This article will talk about a few ways a home appraisal can kill a real estate transaction using a few personal experiences. We will also note some options to help prevent this situation.

Home Appraisal Value & Loan Amount

I provided the link to the article here just for reference, but it may boggle the mind with the amount of numbers they discuss. In short, the article states the third most-frequently cited reason lenders will not loan a family money as, the property not appraising for the value the family asked for on the loan. How, and why does this happen?

Essentially, if the lender will not loan what the family asks for it means the family bid too high for the property. Why would a family bid too high, and why would their real estate agent allow them to? This can happen for a number of reasons. One reason, the REALTOR® estimated the property value too high, or the home appraisal estimated the value too low. A second reason, the family loved the home, and something unique about the home simply fit that family perfectly, and so they wanted to pay extra. The third, and I believe the most common in the Central Florida area, includes the low inventory and resulting bidding wars. See below for the examples I mentioned.

Home Appraisal Estimated High/Low

The first example begins with a client we had who submitted an offer on a property in Deland. The listing agent stood firm on the asking price for the property house, while I estimated the price lower based on my research. Both parties ending up meeting in the middle (somewhat) and we executed (signed) a purchase agreement. The property showed beautifully, appearing staged even though the seller still lived there, cleaned and immaculate with a gorgeous view in a nice neighborhood.  The home appraisal came back $40,000 short. On roughly a $200,000 property mind you. This home appraisal even shocked me… Needless to say, the agreement fell apart. The buyer would pay that much out of pocket, the seller would not come down that far, and meeting in the middle did not appease either party.

We moved on, and found the buyer another property that they loved. A couple months later while attending another entirely different closing, I recognized the seller. At the same closing company, at the same time… the odds of this actually occurring – statistically staggering. I learned that the the property sold, and the buyers financed, for a price ***extremely*** close to the original asking price. Why one home appraisal estimated $40,000 lower in value than the other, I have no idea. But it happens.

Unique Use Home Appraisal

In our second example, we worked with a client that enjoyed working on antique cars. Unfortunately for his hobby, his current home had deed restrictions. The Homeowner Association (HOA) would not allow him to work on his antiques, or enforced too many restrictions to allow it. We ended up finding a property with a custom built garage located on the back of the property.  The property, built outside of a development, did not have an HOA or the associated restrictions. The “3 car” garage boasted roughly 3,000 square feet under air by itself, not counting the home, with 6 bay doors (2 per section) and its own bathroom.

This unique addition would serve very few other families well… but because it fit so perfectly with this particular family’s needs and desires, they valued the property more than a standard home appraisal value would.  The home appraiser knowing about the demand for this particular unique use can use that information in their adjustments.  Without knowing about the demand though, the home appraiser will instead look at the broader appeal and marketability upon future resale.

Home Appraisal & Multiple Offer Situations

Our last example will discuss at length multiple offer situations, or as many buyers refer to them, the “bidding wars.” For a home seller, the most optimal sales experience includes multiple offer situations.  They garner enough offers that the seller can pick and choose the “best” one. On the downside, these bidding wars have the potential to net the seller less money, oddly enough. Let us look at why.

Comparable Properties

The reason stems back to the appraiser once again. home appraisers have a set of standards they train to follow, called the Uniform Standards of Professional Appraisal Practice (USPAP). However, the appraisal process is still largely subjective in nature. So when an appraiser receives or researches different pieces of information, the appraised value of the property may change based on that information.  For instance, residential home appraisals typically look at “comparative properties”. These properties will typically share a large number of similarities as the property they are attempting to appraise.  The original property we call the “subject property”.  The different similarities they will look at include:

• Footprint of the home, or square footage under roof and/or air
• Property age, including associated wiring and plumbing
• Lot size, and associated infrastructure (thing underground oil tanks)
• Additional structures, and amenities
• Distance from the subject property
• Current market status (Active on the market, pending, etc)
• Length of time since a property was sold
• The neighborhood, HOA/Condo Association, etc

The Offer

All of these characteristics, and many more play a factor in the determination of the property home appraisal value.  The one major item many people do not consider though includes the offer itself. I know many times in my own experience, the home appraiser has been given the offer for review. Whether it happens all the time or not, I have no idea as I do not work on that side of the industry. However, I also know many appraisers have been given the REALTOR® or real estate agents Comparative Market Analysis (CMA), or Broker’s Price Opinion (BPO). Both report an estimated value of the property, typically using the same methods as the appraiser. Although because the reports did not come from an appraiser, we must legally refer to them as something other than an appraisal.

Now, whether or not the appraiser uses this information or not depends 100% on the appraiser.  I know some have sworn they never even look at them. Other appraisers look at the offers and opinions of the agents, but do not use them. Finally, a few do use these pieces of information, and some have weighted them rather heavily.  This last one is where the fun stuff happens (in my opinion), and why having an experienced real estate agent or REALTOR® can really help (yes, another marketing blurb).

Multiple Offer Selections

In a multiple offer situation, where the seller has a choice of which offer they want to move forward with, a REALTOR® may counsel the seller to accept an offer other than the highest. Why would an agent counsel and suggest accepting an offer other than the highest? Because choosing the highest offer opens the door for the appraisal to killed the deal. The listing agent (the agent assisting the seller) will know when the offer comes in significantly higher than the actual value of the property.

The listing agent has an obligation to negotiate the highest amount possible for the property on the seller’s behalf. We agree to this “obligation” when we become a REALTOR®, spelled out in our Code of Ethics.  This obligation is not a choice.  In an effort to obtain the highest amount for the property, the REALTOR® will suggest the seller list the home (advertise with the asking price) for the highest reasonable value.  This value must still draw in buyer interest.  Go too high, and no one will even look at the property.  Too low and prospective buyers will submit offers too low to negotiate or even consider.

Why Accept Less

After negotiating a multiple offer situation and generating the best offers from each prospective buyer, the listing agent will present them all to the seller. An experienced REALTOR® will advise the seller that an offer $20,000 over asking, while enticing, will cause an appraisal issue. This appraisal issue will require either the seller or buyer to move in a direction they would prefer not to.  The seller would have to lower what they will accept, and no one wants to do that. The buyer on the other hand, must provide actual cash to pay the difference. The bank will only loan for the value the property appraised for. If one of those, or some combination of the two does not happen, the agreement falls apart.

To avoid this, an agent could suggest choosing the offer only $5,000 over asking price instead of the highest offer.  In this case, the appraiser will very likely use the offer, noting the demand for this property. The comparable properties may indicate the home value $5,000 lower, but on a $200,000 home that equals a 2.5% difference. Many would consider 2.5% a reasonable market gain.  And even if the appraiser does not bump the value based on the offer(s), the $5,000 difference has a greater chance for a negotiation than a $20,000 difference.

Summary

As you can see, a home appraisal can kill a real estate transaction for only one reason usually.  Because the home appraisal tells the bank that the property value does not meet or exceed the loan amount. To help avoid this situation, try to:

• Obtain a property evaluation from an experienced professional
• As the seller, ensure the marketing targets the appropriate buyers
• As the buyer, ensure you keep your bid within a reasonable range of the asking price
• In a multiple offer situation, consider other options outside of higher bids
• As a buyer, know that using a REALTOR® costs you nothing out of pocket

Good luck! And let us know how we can help you get into your #dreamhome!