What do you do when the appraiser measures the home smaller than is advertised on the MLS and the appraisal value comes in lower than the contract price?
The lovely couple with two small children fell in love with the home. The right number of bedrooms, open layout and beautiful upgraded finishes. Cul-de-sac lot. Nice-sized yard. Great neighborhood in DC Ranch in Scottsdale for their family! It fit all their needs perfectly. The contract and repairs were successfully negotiated with the seller and all was moving forward.
My buyers asked me if they should go ahead and place the order for carpet and a few things they were planning on putting in the house after close of escrow. I told them that it would probably be best to wait until after the appraisal was done for their loan. So glad they asked first, because the appraisal came back a few days later for $20,000 less than contract value. If the sinking feeling in your stomach isn't bad enough, you know that you have to tell your buyer - if the lender hasn't already told them - and more fun yet, you have to tell the seller's agent. But first I reviewed the appraisal to look at the comps that were used. They were all within the last six months, in the same neighborhood in DC Ranch in Scottsdale. So how could the appraisal be off? And then I noticed it - the appraiser's square footage was smaller than what was in the MLS plano and the county assessor's report - by almost 300 feet! My first thought was that the appraiser was using the wrong square foot figure! But I knew that couldn't be right, because an appraiser actually measures the house.
I went back and checked all the resales for this 6-year old home, and found that the first resale actually listed the lower figure from BUILDER. Subsequent resale listings used the county assessor's larger figure. In our MLS the figures listed in the MLS are typically taken from one of three different sources; 1) the county assessor (which is what the seller used in the MLS), 2) an appraiser, and 3) the builder. I always tell buyers to beware if the listed home size comes from OWNER, which strangely is actually allowed.
I dashed off a note to the lender, asking him to double-check with the appraiser about the measurement. The answer came back that the appraiser had indeed measured the home. I discussed with my buyers that we could do a few things at this point, as they have five (5) days after the appraisal comes back to cancel the contract. They could:
- Ask the seller to reduce the contract price to the appraised value
- Negotiate with the seller for something in between
- Cancel the contract, or;
- Accept the appraiser's value and pay the difference in cash between the appraised value and the purchase price
My buyers requested that we ask the seller to reduce the purchase price $20,000. Before I called the seller's agent I armed myself with the items to share with her to prove the measurement was more correct than the county assessor's, including:
- Original resale listing in MLS from 6 years ago showing builder's square footage
- Appraisal, with buyer's permission to share with the seller
- The floor plans that I had collected from the builder 6 years ago actually came in handy - I was actually able to dig them out of my files!
The seller's agent was just as unhappy as I was regarding the appraisal issue. We discussed the items that I had showing the smaller square footage for this home, and I told her I'd send them over for her to review with the seller. She agreed, and the next day I got a call back saying that the seller had agreed to lower the purchase price to meet the appraised value. Turns out that when the seller purchased the home a few years ago in DC Ranch in Scottsdale - not with this same broker - he'd paid cash and had not gotten an appraisal or had the home measured. So even if a buyer is paying cash, they may want to have the home measured just to make sure that they are getting what they think they are getting.
Part 2 coming up - "how to lower your assessed tax valuation."