Whether you’re a seller and reviewing an offer on your luxury home or you’re thinking about refinancing, at some point your property will be appraised to arrive at a current market value. If you’re a seller, the buyer’s lender will order a property appraiser from its approved appraiser list and will begin the valuation process with a copy of your sales contract.
The sales contract is an agreement between the buyer and the seller where the seller agrees to sell at the lowest acceptable price and the buyer makes an offer at the highest acceptable price. Where those two prices meet is the final sales price.
The appraiser will then research recent sales of similar luxury homes in the area by accessing public records as well as the local multiple listing service and compare those sales to the one agreed to by the buyer and seller.
In the instance of a refinance, the lender also orders an appraiser who will review recent sales of similar homes in the area and assign a current market valuation on the subject property. In the same manner, the appraiser will research public records and the multiple listing service to identify recent sales of homes.
Note, any appraiser will tell you that a property appraisal is both a science as well as an art. The science part is the recorded sales data and where art comes into play is when the appraiser assigns different values based upon different features between the subject property and the recent, comparable sales identified.
Generally speaking, say a 5,000 square foot home sold down the street last month for $1 million. That equates to $200 per square foot. Now let’s say a luxury homeowner is refinancing a jumbo mortgage and is nearly identical to the home sold down the street. However, the subject property has a valley view, an in-ground pool and a separate workout facility.
The appraiser must then make a determination what the additional view, pool and workout facility adds to the subject property, considering the $200 per square foot data point. Appraisers refer to generally acceptable adjustments for items such as a pool or view. But let’s say the appraiser thinks the subject property being refinanced has an additional $40,000 in value and places the final value at $1,040,000. The appraiser will typically identify at minimum three such comparable sales in the appraisal report.
Because an appraisal is part art, there are some things you can do that can positively affect the final outcome. This is true whether you’re selling or refinancing a jumbo mortgage. Here are some things you can have done that can boost the final appraised value of your home:
Enhance your curb appeal. Curb appeal is what your home first looks like from the street. When the appraiser arrives, will the appraiser see leaves and limbs on the lawn? Is the driveway clear of debris? Sidewalks power washed? Lawn perfectly manicured? First impressions are important.
On the inside, is the house sparkling clean? Have you “uncluttered” your home? Your real estate agent can help with things you can do on your own that will affect your final value but can include a designer master bath, a luxury kitchen with gleaming appliances? Is the flooring clear of marks or stains? When was the last time the interior of your home was painted? A fresh new coat of paint using light, soft colors is perhaps the most cost-effective way to increase perceived value.
Finally, if you or your realtor has details about recent sales in the area the appraiser might not have access to, let the appraiser know what you know. Was there a private sale down the street the appraiser wouldn’t know about? Or was there a home recently sold well below market price? Many times a home is priced for a quick sale due to extenuating circumstances such as a divorce, a loss of a job or other unfortunate event. Appraisers typically won’t know the intimate details, but you and your agent just might.
How Lenders Use an Appraisal
What you and the buyer think your property is worth may not coincide with what the appraiser thinks. When refinancing a jumbo mortgage, the lender won’t have a sales contract as a reference but you will be asked what you think your home is worth as the lender proceeds to order your appraisal.
The appraisal is the final arbiter regarding the value and a basis for a loan amount. In the instance of a sale, the lender will use the lower of the sales price or appraised value. For example, if the sales contract is for $1.1 million yet the appraisal comes in at $1 million, that means your buyers would have to come to the settlement table with the difference, or in this example $100,000. Most sales contracts have language built in that allows the buyers to withdraw or renegotiate a contract should the appraisal come in low.
In many instances, the buyers decide to walk from the deal as the sellers and the listing agent regroup and reevaluate the list price of the home. If the sellers stand firm on the price, the buyers have some decisions to make. Furthermore, if the home seller doesn’t adjust the price closer to the newly appraised value, it’s likely the same comparable sales will be used and the appraised value will come in low yet again.
Let’s look at an example. Typical jumbo financing asks for a 5-30% down payment depending on the loan amount. Read more about all the Jumbo Loan requirements. The agreed upon sales price is $2 million. For a 30% down payment, that means $600,000 from the buyers. If the property appraisal comes in at $1.9 million, the buyers must then come to the closing table with the $100,000 difference in addition to the down payment. Unless the sellers or the listing agent can provide additional details about the property or recent sales in the area that will support a higher price and unless the buyers really, really want this home, the deal is probably going nowhere.
When a lender reviews a jumbo appraisal, the lender also approves the appraisal. In effect, when financing a jumbo purchase, the lender approves not just the borrowers but the property as well. There are generally two approvals that need to be made, even if the borrowers are well-qualified. If the appraisal isn’t approved by the lender in-house team, there either needs to be another appraisal ordered and approved or the deal is essentially dead.
The lender will review the appraisal to make sure the appraiser used all the proper comparable sales in the area. Comparable sales are those that are most like the subject property closest to the subject. For example, an appraiser cannot use a condominium in an appraiser when the subject is a single family home, for example. Or, if an appraisal uses a comparable sale that is further away from a recent sale and ignored, the lender will want to know why.
If there are five luxury homes in a development the homes that are most similar to the subject property as well as closest to will be the ones used. If the lender determines the appraiser did not use the proper comparable sales and the appraiser cannot explain why the outlying comparable sale was used, the lender will likely turn down the appraisal report and therefore decline the jumbo loan application altogether.
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