You’ve finally made the decision to put your home up for sale. And it wasn’t easy. Because you love this house. You’ve raised your family there. You and your spouse have built a life there.
But because the time to sell has arrived, you’ve made an appointment with your favorite real estate agent to take a look at the house and talk about the listing price. You have an idea of what you think it is worth in today’s market. Your Realtor says a Comparative Market Analysis, otherwise known as a CMA, will help you to put a reasonable number on the house.
You price the home in the vicinity of where the CMA suggests it ought to be. Like most owners, you pick the high end of that vicinity, Then, because you know all buyers want to negotiate a price lower than list, you tack on an additional 5%.
Good news. You get an offer close to asking price.
You house has definite curb appeal and the interior must look pretty good, because the first day you have five couples come through. On the second day you get good news: one of the couples has made an offer. Because it’s close enough to your asking price, you agree to it.
Not as good news. They need a mortgage.
Like 90% of first time buyers, this family does not have enough money to pay cash. They need a mortgage.
Based on the amount of money they have saved, their income, and any other financial assets they possess, their mortgage broker has pre-approved them for an FHA (Federal Housing Authority) mortgage, which requires only a 3.5% down payment.
So it appears that they are not only willing, but, thanks to the wonder of leverage, able to purchase your home. However, before the bank will grant their mortgage, the buyers must pay for an appraisal of your home.
The appraisal determines the value of your home.
The lending institution (bank) sends a licensed appraiser to look at your home and to come to a conclusion, based on much of the same information that went into the CMA, what your home is worth. The appraiser’s decision will determine how much the bank will lend the buyers toward their purchase of your home. And that decision, as far as the bank is concerned, will be final.
Get ready for two weeks of worry.
The appraiser spends about half an hour checking out the inside and outside of your home, and may spend another few minutes looking at the neighborhood and its surroundings. But you won’t get the appraisers final answer for 7 – 10 days.
During that time the appraiser sifts through facts and figures concerning other homes in the neighborhood that sold, usually within the past 90 days. Then the appraiser weighs all of this information against your home’s features and the price the buyer has agreed to pay.
By the way, no one I know has ever figured out why it takes so long for an appraisal report to come through. But we mortals are not able to rush the process; anxious calls to your agent or to the buyer’s agent will accomplish nothing.
Sometimes it works and sometimes it doesn’t.
When the appraisal matches the contract price, there’s a happy ending: you get the money and the buyers get the house.
When the appraisal is low, there are problems; and every real estate agent has, at one time or another, run up against an appraisal that comes in below what the buyer agreed to pay.
A low appraisal results in four choices:
- The sale is cancelled and the buyer gets back the deposit; everyone is miserable.
- The buyer agrees to come up with the extra cash needed to close; the deal goes through but the buyers are not so happy because they are sure they overpaid.
- The seller lowers the price a bit and the buyer comes up with some extra cash; the deal closes but the sellers feel they sold under value and the buyers think they overpaid; everyone is annoyed.
- The seller lowers the price to meet the appraisal; the buyers are happy; the sellers are unhappy because they feel cheated; they blame the listing agent.
How to avoid the 4 choices and live happily ever after.
The solution to the appraisal problem is obvious, but 99% of sellers and agents never think of it. Here it is: hire your own independent, licensed appraiser before you put the house up for sale.
That way, you’ll know what the bank’s appraiser will be looking for. In fact, if you hire your own appraiser, you’ll have a jump on getting the price you have in mind. That’s because the appraisal will give you an idea of the current market value of your home. You’ll have a chance to improve your home, and therefore its selling price, before you put it onto the market.
These are some of the reasons your home may appraise at less than you hoped for:
You live in a neighborhood where homes typically sell from $350,000 to $400,000. Because this is your home and you wanted only the best, you upgraded your kitchen two years ago at a cost of $100,000. If you add that number to $400,000, you are $100,000 over the cost of the most expensive home in your area.
Although you’d like to price at $500,000, and your economic reasoning appears to be sound, an appraiser will burst your bubble with this explanation: no bank will finance a home that is priced so far above the rest of the homes in the neighborhood, no matter how appealing that house may be.
So, you can improve your home to whatever extent you like. But don’t expect to recoup 100% of the cost of that improvement, no matter what your contractor or the do-it-yourself TV shows tell you.
Your home is a showcase. But it’s a 20 year old showcase. Even though your house is in perfect, move-in condition, comparable homes in the neighborhood have new kitchens and baths.
Or, your home was built in the 1960s. You have installed new kitchens and baths, you’ve recently painted the whole house, and you’ve just retiled the 300 square foot, screened-in Florida room.
But because most other homes in the area have added windows to that Florida room so that it is fully enclosed, your home is 300 square feet smaller than the competition.
Despite the fact that location, location, and location are the three most important aspects of real estate, you can’t move your home away from where it is.
If your home has an interstate highway behind it, or train tracks, or you’re in the flight path of an airport, the noise factor will influence an appraiser’s perception and a buyer’s perception of the value.
Or, once again, you may have improved that home far beyond what your neighbors have done. But a house that’s four blocks away from that noise factor, even with fewer improvements, may be equal to or greater in value than your home.
The location factor also applies to condominiums and townhouses.
If you live in a condo near the ocean and you face the water, you are in a prime location. Your condo, if it is equal in size and improvements to the one that faces the street on the opposite of the building, will be worth far more.
If your view is of the railroad tracks but your neighbor’s condo overlooks the pool, that condo will have a greater value, even though you share the same lobby and amenities.
Similarly, the improvement / lack of improvement factor also applies if the condo location is equal.
Bedrooms versus square footage
All things being equal, if your 2 bedroom house is the same size as a neighbor’s 3 bedroom house, your home will be valued at a lower price. So if you took down a wall to expand your child’s room or the master bedroom, put it back up before the appraisal.
Can you fix an appraisal?
If the bank’s appraisal comes in low, you can try to talk to the appraiser. You may have some information that will positively influence the evaluation.
For example, there might have been a recent private sale of a home– one that was not registered with the MLS (multiple listing service) – that the appraiser did not come across. If that home compares favorably to yours and its price was where you need to be, by all means mention it.
However, many appraisers will not respond to a seller after they have rendered their judgment. And in the case of FHA appraisals, that valuation sits on your house for a 6 month period.
So even if another family comes along and wants to buy your home at the listing price, if they are using an FHA loan, the original appraisal will kill the deal.
Can you still get your price?
If the buyers come with cash and agree to your listing price, there’s no problem.
If their financing is a conventional loan from Fannie Mae or Freddie Mac, their lender will do its own appraisal. That number might be different, or it could be the same, as the original appraisal.
Two easy ways to avoid frustration and save time, energy, and money on the selling and appraisal process.
- If you haven’t improved your home in a significant manner, don’t do it now. Stick to simple things. Paint where paint is needed. Clean up the outside of the home so it looks inviting. Clean up your clutter and keep the home neat and tidy during showings.
- Ask your real estate agent to bring in an appraiser and use that evaluation as the selling price.
That way – after the lender’s appraiser renders the price verdict that you have already been prepared for by your own appraiser – both you and the buyer will attend the closing with smiles on your faces.
Mystery solved. And the buyers and sellers lived happily ever after.
Marc Jablon, the Jablon Team
New Harbor Realty