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After all the work of preparing, marketing, and showing your house, it’s finally under contract at top price. You think your house sale is all wrapped up — but you’re not done yet. Typically within a week after you’ve had the house inspected, you’ll most likely have to endure a home appraisal, a professional assessment of your home’s value.
“The purpose of an appraisal is to determine the market value of a home at a specific point in time,” explains Brandy March, executive officer of the Iowa Real Estate Appraiser Examining Board. The appraisal is a crucial step in the closing process; your home must appraise for equal to or more than the sale price for the buyer’s lender to approve their mortgage.
Appraisals were a hot topic last year, with home values at record highs, says Anthony Marguleas, a top real agent who is listed as one of the 100 most influential real estate agents in California. Bidding wars enabled buyers to offer over asking price for houses, which, in some cases, resulted in low appraisals threatening the deal.
We spoke with several licensed appraisers for all the details on what negatively affects a home appraisal. We’ll teach you what to look out for and how to prepare for an appraisal … and how to recover from a disappointing one.
An appraisal is a professional assessment of your home’s value
For home sales, the buyer’s mortgage lender typically hires a third-party appraisal management company to conduct an appraisal. This unbiased estimation of the home’s fair market value helps the lender determine if the property is worth what the buyer is trying to borrow to purchase it.
The lender must ensure that they’re not loaning the buyer more than the property is worth in the instance the buyer defaults on their mortgage and the lender takes possession of the property.
If the appraisal comes in lower than the sales price, the buyer will need to make up the difference in cash or work with the seller to lower the sale price in order to close.
FHA loans require a special appraisal
If the buyer is financing the property with an FHA loan, an official FHA loan appraiser must conduct the appraisal, in accordance with HUD’s designated guidelines. The FHA appraiser ensures that the property meets HUD’s minimum property requirements.
For the most part, what would negatively affect property value in a standard appraisal is the same as in an FHA appraisal. However, there are some FHA-specific issues to note, as we’ll detail in our list below.
Common issues that might impact an appraisal
An appraiser evaluates the general condition of your home. As March explains, an appraiser “looks at everything” that may impact the property’s desirability, including:
- The land, the home’s condition (peeling paint, missing door handles, etc.)
- “Obsolescences” (such as a Jack and Jill bathroom with access through only one bedroom), and
- Proximity to external elements like airports and railroads
If an appraiser sees things that detract from the home’s value, they deduct value from the home.
While appraisers look at the following items in our list, Michael Ford, general certified real estate appraiser, notes that “Only a few are separately quantifiable in terms of recognized market impact (deductions or additions).”
“It’s misleading to suggest any appraiser adds or deducts specifically for [something like] double- or triple-glazed windows. However, their presence contributes to the overall impression of condition, effective age, and quality.”
He does say, though, that “damage absolutely has a negative impact. It’s a question as to what degree the damage is.”
Here’s a breakdown of some common issues that impact an appraisal include:
Bones of the home
Neglected updates and maintenance
“In our market, age is not as important as condition,” says Mason Spurgeon, certified general appraiser and owner of Spurgeon Appraisals. Appraisers deduct value for neglected updates and maintenance, not for home age alone.
Ford elaborates: “A 120-year-old oak-floored and -walled home with no termite damage that is well-maintained and has undergone updating may compete very effectively with 50-year-old and even 10- 20-year-old housing. Design and appeal can offset actual age.”
To ensure your appraiser notices renovations, Ford advises providing a written list of specific significant upgrades and the dates they were completed, such as built-in appliances replaced ten years ago. Even so, he says most upgrades merely add to the ambiance and add little real value.
Poor quality construction
Ford points out that most newer housing is fundamentally at or above stricter standards than older housing, even in lower-cost housing. “Fit and finish” is always important, he says. Visible staples or finishing nails, as opposed to nicely joined with minimal seams; wood versus particle board cabinets; builder-grade tile counters and fixtures versus custom counters and fixtures.
However, he adds that there can be regional, generational, and comparative differences in construction quality, which may impact an appraisal. Ford shares an example:
“In California, pre-1978 and pre-1992 housing were of lower quality. Pre-1978 did not require any corner sheer panels. After the Northridge earthquake, most California housing is required to have all-around sheer panels for added earthquake damage reduction.”
According to Angie Miller, president, Miller Appraisals, Inc., the impact of quality of construction on an appraisal also depends on current market conditions. “It would need to be something that the market would find inferior” to impact the appraisal. Generally, she says, the market doesn’t notice small details; it weighs the condition of primary finishes, flooring, and countertops.
Ryan Lundquist, a certified residential appraiser, says buyers “tend to look at the big picture of a house. It’s not like they walk through and start deducting value for every little thing. If a roof is in need of replacement, though, they’re probably going to deduct the cost of the roof.”
Of course, he adds, the problem is a lender might not lend on a property without a working roof. “Buyers expect things like the roof and HVAC to be in working condition.”
Spurgeon adds, “If a roof shows significant wear, or if there are signs of leaking on the interior of the home, that can certainly deduct from a home’s value.”
Appraisers don’t climb onto the roof, Miller explains, but “If we see chipped shingles or they look old and curled from the ground, then we may call for an inspector to determine the age left on the roof.”
For an FHA appraisal, the roof should have “a remaining physical life of at least two years.” If it does not, the appraiser must call for repair or replacement.
An appraiser conducts a visual inspection from the ground. “An appraiser can’t get on the roof,” Marguleas agrees. From that vantage point, an appraiser looks for the following issues:
- Curled, cracked, missing, or gapped shingles
- Termite infestation
- Moss buildup
- Hail damage
- Water damage
- Sagging or un-level sloping (a sign of structural damage)
- Failed flashings (the sealing around chimneys, ventilation, and plumbing)
- Attic ridge beams, rafters, and decking
- Ventilation damage
- Bare spots/missing granules (on asphalt shingles)
Slab floors, though common today, are lower quality than poured concrete foundations, according to Ford. “Local submarkets may or may not recognize this. If I’m buying a 1947 house with poured concrete foundation versus a 1951 post-WWII FHA affordable tract house with a slab foundation, slanted roof, and windows five feet above eye level, I’m going for the 1947 built house.”
East coast basements in 100- to 200-year-old homes may not have grouted blocks or poured concrete foundations, Ford continues. Loose brick or old river rock where the grout has fallen out indicates a significant repair needed.
In California, a poured concrete foundation may have been cracked by various earthquakes over the years. A slab foundation may be cracked beyond normal due to adobe expansive soil, and water intrusion under the slab causing “float.”
Any of these foundation issues may negatively affect a home appraisal.
Structural damage like wood rot and termite damage
Miller notes that VA and FHA, and even some conventional loans, call for attention to this detail. “If your home has wood rot or exposed wood, just take care of it before it is listed.”
Disturbed lead paint (for FHA appraisals)
Any chipped paint needs to be scraped and repainted for FHA and VA loans, Miller states.
No energy-efficient upgrades
Appraisers may deduct value for the lack of energy-efficient upgrades like double pane windows in markets where these features are the norm.
Ford shares that “Many energy-efficient upgrades, particularly solar, do not add value in our market.” He believes it’s most likely due to how new the technology is.
Remember, Miller adds, an appraisal is a reflection of the market. This line item will have more importance in some markets, less in others.
Poor heating and cooling systems
According to Ford, whether HVAC systems add or detract from a home’s value varies significantly according to the price range of the home. Many lower price ranges do not recognize any difference between differing HVAC systems, like forced air, baseboard, and geothermal systems; these components can have more significant impacts in higher-end price ranges.
Old or broken appliances
An appraiser notes the condition and quality of appliances. For example, just as non-functional appliances can take a toll on the appraisal if the appraiser knows about them, upgraded items and energy-efficient appliances may boost the appraisal.
Primarily, it’s about the perceived value of the home, Miller explains. Newer, high-end appliances make a house “feel” like it’s worth more than older appliances do. Ultimately, she says, the only one that has importance to most loans is the stove/oven.
In an FHA appraisal, any appliances that remain with the property and contribute to its value must be in working order.
Design and finishes clash with neighborhood standards
Appraisers try to find a home that has a similar appeal. They’ll gauge the comp’s influence on value and determine how it compares with your home’s style, design, features, and finishes.
Miller says it may not have much negative impact in a strong market, but it could affect the sale in a weaker market with more competition.
Features and amenities
Lack of garage
As mentioned previously, the appraised value of garages depends on what the norm is for the market. For instance, Ford shares that in California, mostly only 1950s and older houses were built with a one-car or no garage. However, today, the absence of a two-car garage is a negative. “One is better than none, but two is the market expectation for housing built in the 1960s and later.”
Although garages are usually in demand, Miller says converted garages are common in smaller homes in certain areas.
Bedrooms don’t meet the minimum requirements
Ford states that there is no longer a requirement for a bedroom to have a closet, as long as it is of sufficient size to hold an armoire or similar clothing storage. However, it’s a good idea to check your local building codes to ascertain minimum size, closet requirement, window requirement, heat source, septic system limitations, or egress for basement bedrooms.
Miller adds that the minimum bedroom size is between 70 to 80 square feet. It also must have a window and a door. Walk-through rooms don’t count.
“It’s subjective. In [Los Angeles], bedrooms beyond three rarely produce a premium,” Ford says. “A seven-room house with living room, kitchen, two baths, dining room, and three bedrooms plus a ‘den’ (with or without closet) and 1,650 SF has the same utility as a four-bedroom house of the same size that has no den.” However, the difference between a two-bedroom and a three-bedroom is more notable.
Spurgeon says in the rural markets he works in, the number of bedrooms in a home does not alter the value. “Buyers are more concerned with the overall square footage of the home.”
No outdoor living space
Outdoor living space is becoming more popular. Miller says even condo owners are starting to add small patio areas. Ultimately, it depends on the demand in the neighborhood.
Pool in disrepair
Pools that are damaged or poorly aged will hurt the appraised value of your home. An appraiser is required to report observable defects that would result in an unusable pool. Swimming pools must be operational.
According to Lundquist, “There isn’t a one-size-fits-all adjustment for a busy street location, so an appraiser has to find some comps with busy locations and compare those to ones without a busy location to understand what sort of price difference there might be.”
Miller says appraisers try to find a comp on the same street to help them determine the influence on value.
Poor curb appeal
Curb appeal is a very subjective attribute that is difficult to quantify, Ford says.
Miller agrees that it usually has minimal impact on an appraisal but says the appraiser would try to find a home in the neighborhood with similar curb appeal to use as a comparison of value.
Jamie Owen, a certified residential real property appraiser for Aspen Appraisal Services, explains that “qualitative differences are usually measured by looking at generally comparable homes that are similar in terms of curb appeal and condition in comparison with those that are either superior or inferior to the property being appraised.” If there is a difference in value, she notes, “it should be evident in the sales price.”
When poor curb appeal does impact value, Owen says it’s often because “homes with poor curb appeal often also lack market appeal on the inside.” If the exterior has been poorly maintained, she has observed that the interior is as well.
Proximity to undesirable features
According to Spurgeon, busy streets, proximity to train tracks and airports, or any other external nuisance can undoubtedly harm a home’s value. Determining these impacts is a complex process that involves combing through a large amount of sales data to find similar instances. This is one of the reasons it is important to find a knowledgeable appraiser to interpret the data.
The best way of measuring the impact of these is by paired sales analysis, Ford agrees. Agent surveys can also be used but are more subjective.
Other external features that may negatively impact an appraisal include proximity to a sewage treatment plant, hog farm, rendering plant, and even schools.
Encroachments are a reduction in the use of your land by the actions of another and should never be taken lightly.
“That corner of their garage that crosses the boundary may only seem like 50 square feet on a 20,000-square-foot site is not important,” Ford says. Still, in practice, it could be limiting the future expansion of your living area due to required setbacks imposed by the city for new development. The effective loss of use for thousands of square feet could result.
Additionally, the subjective impact of loss of utility and intended use of the overall property may be affected. The impact can range from tens of thousands of dollars to hundreds of thousands of dollars.
Legal living area
The legal living area may not include all areas used by the seller, such as an unpermitted enclosed patio that was illegally converted into a family room. Some bootleg garage conversions are dressed up by the euphemism “accessory dwelling unit” but may not be permitted.
Ford says some counties or cities may require the seller to remove or obtain a retroactive permit for illegal additions (even including entire houses) before selling the property.
Zoning and beyond
In some circumstances, zoning, lot size, and other site issues could carry more weight than anything having to do with the improvements, according to Ford. He ranks the details that impact appraisals as location, improvement size, and condition (including age). “Site area or other amenities follow, depending on the specifics.”
Renovations not built to code
March says appraisers don’t look for code violations; that falls under the jurisdiction of an inspector. “Appraisals differ from inspections,” she explains. “Inspections make sure you comply with building codes. Appraisals find the market value of your home.”
However, if an appraiser comes across a code violation, legally, they must report it to the city or county.
Building codes vary from place to place. To find out what rules govern your area, check with your local building inspection department, office of planning and zoning, or department of permits. You may also be subject to HOA regulations or state and federal requirements, depending on the project.
Some of the common code violations found during inspection and appraisal include:
- Overloaded electrical panel
- Improperly retrofitted windows
- Kitchen upgrades
- Bathroom upgrades
- Unpermitted additions
- Exhaust fans venting into the attic
- Open ends of handrails on the wall side of stairways
- Decks not properly secured to the house with ledger board
- Missing, broken, or otherwise inadequate smoke detectors
Steps to challenge a low appraisal
March lists the extensive educational requirements for appraisers. Certification in Iowa requires a college degree, additional training under a supervisor, and passing a national exam. Therefore, it’s no surprise that Fannie Mae reports that appraisals come in low less than 8% of the time — and some of those can be renegotiated higher on appeal.
But if your appraisal comes in low, you can challenge the value with these steps:
- Look for errors in the appraisal report. Request the report and check for any errors. The lender is required to provide a report within 30 days of the request.
- Challenge the appraisal with a Reconsideration of Value. Start an appeals procedure, noting errors like inaccurate measurements or substandard comps.
- Renegotiate with the buyer. Work with the buyer to determine if they are willing to make up the difference in value in cash. Otherwise, you may need to lower the sale price to close the sale.
- Get a second opinion. You can hire a second appraiser and use that report either in an appeal or in negotiations.
If the appraisal comes in low, your sale is at stake
For the buyer who really wants your home, there are alternatives: The buyer could increase the down payment, or you could request an appraisal rebuttal. This is a formal process initiated by the buyer’s lender, asking the appraiser to re-examine his conclusions. But if the numbers don’t work, the buyer can walk, leaving you to begin the arduous process of selling your house all over again.
Header Image Source: (Zac Gudakov / Unsplash)