Appraisal? What is it and are they that big of a deal? UMMM... YES!
So you have gotten the home renovated, repaired, and ready for sale. You decide on a price based on what the current market is doing. The real estate agent gets it staged, photographed, and listed on the Multiple Listing Service (MLS for short) for the world to see. You get potential Buyers to book showings and come and look. They fall in love, make an offer, and the offer gets accepted. GREAT! (Tired already?) In our world, at this point in the game we like to call it "the beginning of the end" because the process is really just getting started. In a typical home sale you still have 2 contingencies to get past, the home inspection and the appraisal. We talked about the home inspection in our last blog post. Once you get past that step the Buyer's lender orders an appraisal (assuming they are getting a loan). We typically like to price our properties at the high end of the pricing spectrum since they have been fully renovated and are truly move in ready. The risk with this is sometime the appraiser may not agree with your calculation versus what comparable properties have sold for This can be a MAJOR money drain as if the property does not appraise for what you got the offer at the Buyer has to either come up with the extra money or you have to drop the price to the appraised value. And every dollar you drop the price is that much less in profit you will receive. Does this happen, OH YES, unfortunately it does. We have had to reduce our price by as much as $18K on one deal in particular. $18K? You know how much can be done with $18K? ALOT! Did it hurt, yep, sure did. Fortunately for us it was a great deal and we still came out OK profit wise on it. And I will mention the Buyer offered ABOVE asking price, so in reality we got what we thought we were going to get anyways, but an extra $18K sure would have been grand :) Having gone through 60+ and counting appraisals, here are 3 common ways to keep this from happening to you...
1. Have a local knowledgeable agent that can help you out in determining a list price. I know some people may want to try and do a "for sale by owner" transaction to save on a commission, etc. But if you list it at the wrong price and are fortunate to get an offer at that price and it doesn't appraise for that price, guess what, you just wasted your time and have to start all over.
2. Make sure you are counting square footage correctly. This is a HUGE deal as a homes value is based on price per square foot. Finished basement square footage does not count as much as main floor square footage. I would recommend counting basement square footage as 1/3 the value of main floor square footage. You may get more and if so, even better, but don't count on it. It also depends on how finished out the basement is. If you still have concrete floors and exposed brick o block walls, it will get less than carpeted floors and sheetrocked walls. Another one to pay attention to is finished out attic/upstairs space. You can only count 7 feet plus ceiling height as regular square footage. Moral of the story is to make sure you don't count something as square footage that isn't and include that in your list price as it could all get taken away one the appraiser comes. You can have a professional come and measure if you want to be exact.
3. Make sure your value is based on "Closed" comparables. That means what has actually sold, not what is for sale now. An appraiser is going to look at the price that a property has actually closed at. This is one reason Zillow and other online real estate websites are so unreliable as they are pulling data from all kinds of different online sources. While you could get more than what others have sold for don't count on it.
This a brief summary of the appraisal process and ways that it can go south pretty quickly. A good real estate agent can help talk you through these things and make sure your list price is in check and that when that appraisal is ordered there are no surprisess. Good news is once you get past the appraisal hopefully it will be smooth sailing to the closing. Of course the Buyer's loan could fall through, but we will save that story for another day, HA!
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