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…
Mortgage guidelines can change at any time, so always talk to an experienced mortgage loan officer who will help you understand the current guidelines and how they might apply to you.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
There has to be a better way of presenting this information to the buyer though. I personally am having the hardest time hunting through houses in the sizes that I would like, because its hard to tell what the additional sq footage is on finished basements, outer heated buildings, garages and so on. If they just did a general livable sq footage on ALL the finished or hell, even partially finished spaces, it would make life SOOO much easier for the buyer.
Agreed, some Realtors do not do a good job of inputting accurate data, and buyers end up not knowing exactly what they are buying, as far as finished square footage that is considered into the “Gross Living Area” by the appraisers and banking industry. This is why buyers have to do their own due diligence, and get into the house and get a feel for the allowable GLA, and maybe even do their own measurements.
Great blog, Brian. This is clearly not equitable. I have sold properties with fabulous full daylight and walkout basements, but the appraisers treated it like a root cellar.
We own an older, well-kept home in a longstanding subdivision of the same. Due to the lay of the Tennessee land, almost all houses have walk-out basements with windows and doors on the back and even on one side (for example).
Our home is 1/2 mile from a religious university. Nearly all homes in our area have 1 bedroom apartments (not visible from the road. Our home has 3 beautiful 1 bedroom apartments that are fully furnished and with parking off the street. The refinance “driveby” appraisal came back with 1800 sq feet instead of 3600 and no value attached to the apartments. Note that one apartment is was built at the end 3-car garage when we built the garage. This square footage didn’t count either.
We are pretty distressed and astonished at this valuation. Is there no way around this?
Thanks.
They’re likely is no way around this I am afraid. But what I would do is send a copy of your appraisal to some other lenders and see if they can assess the layout any differently. I would also talk to some “portfolio lenders” who don’t follow traditional Fannie Mae guidelines, to see if they’d have a different interpretation. Although you would likely pay portfolio lender a higher interest-rate 🙁 Good luck.