Before you sign a contract to sell your home, check to see if
the purchase offer depends on financing. Look for a clause
witch states that the offer is contingent on your home's
appraisal done by the buyer's mortgage lender. This clause
causes many home sellers to lose the sale or to lower the
sales price later.
Appraisers draw on comparable market sales (comps) of local
properties sold within the last six months to value your
home. With today’s rapidly rising seller’s market, six-month-
old information is ancient history. Appraised value does not
always equal the true market value, or what the home will
sell for on the open market.
Realtors will give you a comparative market analysis, an
informal estimate of market value based on comparable sales.
Lenders, on the other hand, will use the appraised value to
determine a new mortgage amount. Some lenders require that
the stated property value covers the mortgage amount plus
their selling costs in case of foreclosure. For this reason,
a sale may fall through if a home sells on the open market
for more than the appraised value, which often happens in
bidding wars over hot property.
We learned the importance of securing a sufficiently high
appraisal when we sold a rental property in Lake Elsinore,
California. We listed the house for $234,700 on Friday. By
Monday morning, we had three offers: $245,000, $255,000, and
$260,000. We accepted the one for $255,000 because the buyers
had $80,000 down, reassuring us that they had sufficient
funds.
As usual, the lender sent an appraiser to review the
property. This busy appraiser didn't take the time to view
all the upgrades we put into the custom-built home. Even
worse, he used only comps from the local one-mile radius.
Because this home is close to a shopping district, there were
not many homes sold in this limited area during the six-month
period.
The appraiser used comps six months old; during this time
housing costs in Southern California appreciated around
thirty percent. Sales from six months previous should have
gone up in value by $30,000 on a $200,000 home. This means
that our home should have been worth $250,000 to $260,000,
especially since buyers are willing to pay this price on the
open market. To increase the value of this home, at the time
there was not another three bedroom home listed in the area
for under $250,000 (excluding manufactured homes). However,
the appraiser valued our home for only $230,000 -- and we
would have lost the sale if the offer did not include a
sufficient down payment.
Because a low appraisal can kill your sale, finding a buyer
with a large down payment provides you with a safety net. You
may also choose a buyer with strong credit who doesn't have
to put a large percentage down. If you think that your home’s
appraisal could become a problem, make sure you don't include
a clause in your sale’s contract which states "subject to
appraisal."
How to Avoid Low Appraisals
Hire your own appraiser before the sale. Then ask your
buyer’s or lender’s appraiser to review your appraisal.
Retain the option to approve your buyer’s mortgage lender.
Make sure that the buyer doesn't use a lender with a history
of deliberately underestimating property values. A good real
estate agent should know which lenders routinely under value
homes.
Keep records of repairs and upgrades, including costs.
Take "before" and "after" photographs. Create an organized
journal with a listing of expenses and include pictures to
show to the appraiser during the appraisal appointment. Stage
your home for the appraiser like you do for buyers.
Secure your own property comparables to make sure the
appraiser uses complete information. Call real estate agents
with homes in escrow and get the sales prices. Make a list of
these properties with the agent’s phone numbers and give it
to the appraiser.
What to Do When Your Selling Appraisal Comes in Too Low:
1. Ask for another appraisal.
2. Protest the appraisal with documentation of your upgraded
expenses.
3. Have the buyers make a larger down payment.
When you sell or buy real estate, remember that the certified
appraisal is just one person’s opinion of the value of your
home. The opinion that counts for you is the buyer’s: you
want to be sure the buyer values your home above all others.
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