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Real Estate Nightmares to Avoid Index
Avoiding Appraisal Pitfalls
When you sell your home, appraisers use what they call "comps" (comparable market sales) of similar local properties sold within the last six months to value your property. With today’s rapidly moving markets, six-month-old information is often ancient history. Appraised value does not always equal the true market value - what the property will sell for on the open market.
by Graham Hamer
Realtors will sometimes give you an informal estimate of market value based on recent comparable sales. Lenders, on the other hand, will use the appraised value to determine what they would be willing to advance as a mortgage.
Let me give you an example of how important it is to securing a sufficiently high appraisal value from the buyer's lenders... Let's temporarily give you ownership of a property listed at 5,000. You're in luck; it's a great property and you get three offers on it at: 5,000, 0,000, and 5,000. You accept the middle one for 0,000 because the buyers have 0,000 cash to put down, reassuring you that they have sufficient funds.
In accordance with usual practice, the lender sends an appraiser to review the property. But this "busy" appraiser doesn't take the time to view all the upgrades you've put into your custom-built home. In fact, he is so "busy" that he also uses only comps from a one-mile radius.
As it happens, there were not many homes sold in this limited area during the previous six-month period but, during this time housing costs in your area have appreciated around twenty percent. So sales from six months previous should have been revalued by about ,000 on a 0,000 home.
This means that your home (which was worth 0,000 six months ago) should have been valued at 0,000 - 5,000 today, especially since competing buyers are willing to pay this price on the open market.
Additionally, right now there is no other four bedroom home listed in the area for under 0,000, so this should also increase the appraised value of your home. However, the "busy" appraiser values your home for only 0,000 - and you would almost certainly have lost the sale if it wasn't for the fact that the offer included 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. Alternatively, you may be fortunate enough to find 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 "subject to appraisal" or "subject to valuation" clause in your pre-sale contract.
How to avoid low appraisalsThe best way is to spend a little money and hire your own appraiser before your put your property on the market. Then you can ask your buyer’s or his lender’s appraiser to review your appraisal. (They may pretend that it's not going to influence their valuation - but don't believe it!!)
Alternatively, you can retain the option to approve your buyer’s mortgage lender. Make sure that the buyer doesn't use a lender with a history of either deliberately underestimating property values or of being to "busy" to get it right! (A good real estate agent will know which lenders routinely under-value homes.)
Keep records of all your major repairs and upgrades, including costs. Think ahead, and take "before" and "after" photographs. Stage your home for the appraiser like you do for buyers.
Establish your own property comparables to make sure the appraiser uses complete and up-to-date information. Call real estate agents with homes in escrow and get the sales prices off them. Make a list of these properties with the agents' phone numbers and give it to the appraiser (or be sure to leave it lying around where he can see it!)
When your Selling Appraisal comes in too low...If the valuation comes in too low, don't hesitate to ask for another appraisal. Don't be afraid to contest the appraisal with documentation of your upgraded expenses and with counter appraisals by others..
If you still have no luck, see if you can't get the buyers to make a larger down payment. That will often resolve the issue.
When you sell or buy real estate, remember that the certified appraiser is just one person with an opinion of the value of your home. Okay, the opinion is (supposedly) from a professional person, but that doesn't mean that there aren't necessarily other valid opinions.
And don't ever forget - the opinion that really counts is the buyer's. You want to be sure the buyer values your home above all others!
Graham Hamer is co-owner of Hometown-Property.com,
where entrepreneurs learn to use the global real estate market, and
Property-Seekers.com, your One-Stop-Property Shop
for online Real Estate sales and rentals.
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