Appraisal came in way under for FHA buyers

3 Replies

I am selling my house for $299,000 as a FSBO and the buyers are pre-approved for an FHA loan. However their appraisal just came back for $266,000 which I believe is incredibly low for the home, the neighborhood, the market, and the lack of inventory on the market. I've requested a copy of the appraisal and comps, but haven't yet received it. The buyers realtor pulled her own comps and I did the following analysis. What are your thoughts?

Comp My Home Comp My Home Comp My Home Comp My Home As Appraised ($266k - $118 sqft) My Home As Listed ($299k - $133 sqft) Comp My Home My Home vs Comp Comp My Home My Home Comp Comp
Address Bed Bed Bath Bath Sqft Sqft $ Per Sqft Sqft Cost Comparison $ Per Sqft Lot Size Lot Size Lot Size Year Built Year Built Yrs Newer Price Date Sold
Comp 1 4 4 3 3 1926 2236 $ 134.48 -12% -1% 8398 10454 24% 1995 1999 4 $ 259,000.00 10/19/2017
Comp 2 3 4 3 3 2446 2236 $ 108.30 9% 23% 10236 10454 2% 1963 1999 36 $ 264,900.00 12/11/2017
Comp 3 4 4 3 3 1345 2236 $ 200.74 -41% -34% 10138 10454 3% 1980 1999 19 $ 270,000.00 9/26/2017
Comp 4 4 4 3 3 1249 2236 $ 255.22 -54% -48% 8455 10454 24% 1996 1999 3 $ 318,771.00 12/12/2017
Comp 5 4 4 3 3 2486 2236 $ 116.65 1% 14% 16117 10454 -35% 1975 1999 24 $ 290,000.00 11/16/2017
Comp 6 4 4 3 3 2276 2236 $ 127.33 -7% 4% 10890 10454 -4% 1978 1999 21 $ 289,800.00 2/15/2018
Comp 7 4 4 3 3 2695 2236 $ 107.98 9% 23% 28185 10454 -63% 1979 1999 20 $ 291,000.00 11/13/2017
Comp 8 4 4 3 3 1134 2236 $ 264.55 -55% -50% 10018 10454 4% 1999 1999 0 $ 300,000.00 9/29/2017
Comp 9 4 4 3 3 2557 2236 $ 123.15 -4% 8% 13068 10454 -20% 1989 1999 10 $ 314,900.00
Comp 10 4 4 2.75 3 2266 2236 $ 135.92 -13% -2% 8712 10454 20% 1971 1999 28 $ 308,000.00 11/3/2017
              % comparison on a cost per sqft basis. Comparing the comp vs the $266k appraised value. Negative values denote 3403 being under valued per sqft compared to comp % comparison on a cost per sqft basis. Comparing the comp vs the $299k sale value. Negative values denote 3403 being under valued per sqft compared to comp     Lost size comparison. Positive numbers indicate % 3403 is larger than comp          

@Tom Del

Those aren't good comps.

A comp is similar style and size and amenities, sold within the last 3-6 months. Adjustments made for differences or issues with availability of recently sold properties. You can't compare a 1249 sqft property to one with 2695 sqft. That's comparing a cape to a mansion.

There are essentially three scenarios: Lower the asking price. The buyer pay the difference out of pocket. The buyer walk away.

From your standpoint, FHA appraisals get a case number and have a 120 day expiration. If your next potential buyer will also seek FHA lending you'll still have the same problem...

Hi Tom,

I agree with Christopher, Those aren't good comps. You would want your comps to be closer to size as the subject property, particularly the heated sq ft. Even with the adjustment being made for the differences in sq. ft, sometimes for the comps that are much bigger, adjustments would have to be made elsewhere. For instance. comp 7 and 8 is drastically off and comp 7 is an entire house bigger than comp 8. I also personally believe that when all those comps are being used, numbers start getting skewed. 

I also agree with Christopher regarding your options for buyers on the FHA loan, however, I've had a buyer utilizing a conventional loan with 40% down and we had a similar appraisal issue where those same options applied to him. They didn't have to pay the difference out of pocket due to the large downpayment, however, they refused to purchase an overpriced property. I make sure that all of my buyers sign an appraisal contingency, so we were able to negotiate the price a bit. With that being said, whether the buyer is using an FHA or not, the same issue may come up with a buyer on a conventional loan.

One note, a buyer on an FHA loan will most likely not be able to pay the difference out of pocket, so you're down to two options, find another buyer who will or lower the price.

Dollars per square foot is not how houses are priced.  That metric does come into play, but only indirectly.  What happens is the appraiser starts with an average $/sq.ft number for the area, then makes adjustments to the comps based on the difference.  The adjustment is typically a third to half the $/sq.ft.  For instance, if the $118 number is the average, and a comp is 100 sq.ft. larger, the appraise would adjust the comp's sales price by about 1/3 * $188 * 100 = about $6000.

Further, looking at your comps, some are about half the size of others, yet the prices are similar.  That makes me think you're dealing with basements.  The "smaller" properties are only the ground floor footage and the "larger" ones include the basement.  Basement square footage, at least around here, is only worth maybe 10% of the value of ground floor footage.  If you're lumping ground floor and basement footage together, you'll get a really poor estimate of value.  Those have to be adjusted separately.  Second story footage, if that's in play, is more valuable than basement footage, but still only about half what ground floor footage is worth.

Ideally comps would be ONLY the same style.  E.G., a ranch with basement property would only be compared to other ranch with basement properties.  If you're mixing styles, that also will lead to woefully inaccurate values.

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