I haven’t written many entries about appraisals. Mostly, it’s not been something I’m that interested in.

It’s a very important subject, though. It was important when prices were rising, and it’s important now that prices are … not rising.

If you’re buying a property, you probably want your lender (meaning, the appraiser hired by your lender) to agree with your purchase price.

(Of course, if you’re trying to get out of buying a property, you probably don’t want your lender to agree with your purchase price.)

An interesting situation is if you’re buying in a building under construction. First off, how can you know whether the property will be worth tomorrow what you’re willing to pay today? Of course, a couple years ago, it wasn’t a concern.

But, say you put down a deposit two years ago, and the project is just now being completed. Or, say you’re making an offer today, but the project won’t be done until 2009?

This is more of an issue in the suburbs, right now, than in downtown Boston, and also throughout the United States, right?

If the lender says it can’t justify your purchase price, you have two options. If you’ve been smart, your sales contract gives you the option of withdrawing from the purchase and getting your deposit back. In the past, many developers didn’t allow buyers to include this. These days, however, you can almost always require it, and I’d suggest you shouldn’t sign a contract, otherwise.

The other option is you kick in the remainder due, out of your pocket. So, if the property appraises at $550,000, but you’ve offered to pay $600,000, you can increase your out-of-pocket contribution by $50,000.

Hopefully, the difference wouldn’t be that extreme. If it was, would you really want to buy something that wasn’t worth what you paid, on Day 1?

(If your lender’s appraiser can’t justify the price and you try to get out of your contract, the developer may very well force you to have one or two additional appraisals done, including one by an appraiser hired by the developer. Your contract may require this. The worst case scenario would be if the developer’s appraiser comes back saying the property is worth what you were willing to pay, yet your own lender’s appraiser says, “No way.” Then what do you do?)

Another interesting situation is when the developer changes the pricing on a project under construction.

This was discussed in-depth in a post on the Matrix blog.

During the boom, a builder would typically have several phases offered…phase 1 might be priced at $160 per square foot, phase 2 would jump to $180 PSF, phase 3 at $210 and so on.

My question is: how was an appraiser able to justify the purchase price of the first buyer in phase 2, when every single comp in phase 1 was so much less expensive? And how did the first buyer in phase 3 get an appraisal for a price substantially higher than all the comps in phases 1 and 2? It never made sense to me and I felt then (and still feel now) that the ability of developers to get appraisals to justify any price allowed them to create sales pitches based on appreciation rather then the intrinsic value of home ownership.

Interesting question, and the answer is, in my opinion, “It doesn’t always make sense.”

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Updated: 1st Q 2018

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