I have recently had a re-occurrence of an appraisal issue that keeps repeating itself. I am not sure if its part of the tightening of underwriting standards, or if it’s logical. But I’d like to explain the recent issue so everyone can be aware of it. This piggybacks off of a blog that I wrote about in the past, related to a basement that was not counted in the square footage of the house.
The current situation is that I have a client who is buying a home in Maryland for $700,000. There was only one problem, the appraisal came in low at $620,000. The appraiser said that the home was never exposed to the market (it was never listed for sale). The appraiser has recent, close in proximity, and comparable sales.
The Realtors and the seller claimed the home had extra value because it had a lot that was almost an acre, and they said it was a 2,000 square foot home, and that the appraiser only used 1400 square foot comps. The Realtors sent over 2,000 square foot comps.
There are a few problems with this:
1. The subject property is only 1400 ft.² above grade, and was almost 700 ft.² below grade. The 700 ft.² below grade was all finished living area, but Fannie Mae, the banks, and underwriters do not count below grade square footage in the gross living area (GLA), whether it is finished or not. If square footage is wholly or partially below grade, it won’t count in the square footage figures for GLA. It will count as below grade/basement/recreation room square footage.
2. Also, banks, underwriters and Fannie Mae and Freddie Mac do not give as much weight and value to an extra large lot as a Realtor or seller may. Fannie Mae and Freddie Mac would tell you that they are out to make home loans, not land loans. As a matter fact, when I do a loan on a farmhouse, that has 10 acres of land let’s say, and also has a house built on it; Fannie Mae and Freddie Mac will make us back out what they call “excess land value.” In other words, they will not value the land as much as someone else might, because they are making home loans, not land loans. The moral of the story is if you’re going to get a loan that is backed by Fannie Mae and Freddie Mac, you have to play by their rules, and the rules say that they are lending on home value mostly, and we cannot count extra value from an extra large lot.
The Realtors and the seller in this case say a General Contractor would pay $625,000 for the lot value alone. And Fannie Mae and Freddie Mac would tell them, please invite the general contractor over to make a purchase for $625,000, because Fannie Mae and Freddie Mac are not going to lend on a home that they want valued at $700,000 when an appraiser values the home at $620,000; just because it has an extra large lot.
It is just common sense that people want to live above grade, or so it seems since caveman times. Below grade is for storage, and playrooms. Real gross living area is above grade. This is just the way the marketplace works. And if someone would like to disagree, then they’re going to have to pay cash for property that has a lot of finish below grade square footage. If you want a loan from Fannie Mae and Freddie Mac you’re going to have to play by the rules.
I have said it time and time again, GLA that is below grade, no matter whether it is finished or not, cannot be counted in the total square footage. So when someone tries to compare a 2,000 square foot home that is all above grade, with a property that may only have 1300 ft.² above grade and the rest is finished square footage below grade, there is no comparison. Not according to Fannie Mae and Freddie Mac, underwriters, and the banks anyway…
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