Am I getting screwed on my house purchase?
February 25, 2015 1:53 PM   Subscribe

In the process of buying a house, have questions about the appraisal...

We are buying a house in Maryland. The first appraisal came back almost $40k under the initial asking price because they did not include the basement as part of the sq. footage in the appraisal. However, the basement is considered taxable sq. footage. My limited understanding is that anything that is taxable should be factored into the appraisal, however I can't seem to find a clear answer on this.

If it matters, the house in question has a partially above-grade basement (there is a door in the basement that opens to the outside at ground level, no stairs).

Because the sellers didn't like the answer of the first appraiser, we are now trying to go through a new lender (whom the seller's agent recommended) to go through the whole process again to get a second appraisal. However, if the basement really should be excluded from the appraisal value even though it is taxable sq. footage, I don't see how this will help us. I am worried about the new lender coming back with a much higher appraisal that the sellers will like, but that won't actually be accurate and will screw us in the long run when we try to sell the house many years in the future.

Thanks for any advice.
posted by Librarypt to Home & Garden (18 answers total) 4 users marked this as a favorite
You say 'they' did not include the basement--that's your bank, right? Your bank would be the ones doing the appraisal. If there is a mistake on the appraisal or misunderstanding about what's included in bank-appraised versus taxing-entity-appraised square footage, then you can bring that up with your loan officer and, if you have the appraiser's direct contact information, the appraiser himself. If you're using an agent, shame on them for not getting you an answer sooner, and double-shame on them for not knowing this in the first place!!!

Only YOU decide whether to go through a new lender or not since you'll be the one with the lien on your house. I'd do everything I could to go with the lower appraisal. As you recognize, it's to your disadvantage to try again for a higher appraisal--and appraisals CAN be influenced by agents/realtors. It's grossly wrong, but it happens. A possible compromise is to get YOUR new bank (make sure you understand you're the one in charge here) to use the other appraiser's comps so that values aren't changing, but--if there is indeed a mistake in including/excluding the basement's square footage--simply to re-calculate the value based on that. (This may not work if the comps don't have basements.)

If your bank and its appraiser insist they haven't made a mistake, then you are left with two options: pony up the cash to make up the $40k or convince the sellers to lower their price and finance the house with your original lender. I assume you don't have the cash to make up the difference in appraisal-to-sale value and that the sellers aren't budging on price? Otherwise, if you really want the house and are willing to change lenders and risk a new, possibly higher appraisal, you'll do what the sellers say.

Best of luck!
posted by resurrexit at 2:13 PM on February 25, 2015 [5 favorites]

Another issue: is the taxing entity erroneously considering the basement area taxable? Maybe put in a call to them to ask what the criteria are. That could be the source of the bank appraisal problem.
posted by resurrexit at 2:14 PM on February 25, 2015

To fairly measure comparables, the basement should not be included in the appraisal.
posted by Emera Gratia at 2:16 PM on February 25, 2015

I would see this as a great opportunity to further negotiate the price down with the sellers.
posted by treehorn+bunny at 2:25 PM on February 25, 2015 [5 favorites]

I had something similar to this in Atlanta. Our house was on sloping lot, so in the front it was below grade and in the back it was full walk-out, daylight. For taxes, the basement wasn't included in the square footage, although we had an 8 ft ceiling in there and it was the square footage of the entire upper level. Ah! Don't you love a split level?

Are the sellers getting a different appraisal? Are they paying your loan origination fees for you? Because that's the only way I'd remotely entertain doing what you're doing. Make the sellers pay. Don't YOU start spending money trying to get someone to say the house is worth more than it is.

Banks aren't in the business of not giving loans. Their appraisers are looking out for THEIR interests and ancillarily, yours. Check the comps again, because they are the single most important predictors of home value in an area. If the comps don't support the pricing, then the house isn't worth what they're asking and you have every good reason to negotiate harder or to walk away.

There are such things as houses priced out of their market. People who put gold plated fixtures on a starter home or who upgrade everything when everyone else in the neighborhood is making do with builder-grade stuff.

Now, if the home is 100% perfect for you, you have an option to pay the asking price and to take out only the mortgage the bank will grant, making up the difference with your cash.
posted by Ruthless Bunny at 2:42 PM on February 25, 2015 [3 favorites]

This is a really good question, because as you said, you'll be on the other side of it eventually. First, your real estate agent should absolutely know the answer to this, and most relevantly whether, as Emera said, the comps that justify its price also include basement footage. I would be riding my RE agent pretty hard to provide the numbers for your top 5 comps. This kind of detailed knowledge and/or research is how they should earn their money.

Second, I'd certainly spend a few hundred bucks on another appraisal -- money well spent -- but absolutely NOT one recommended by the seller.

Remember that everyone else (including your realtor) at this point wants the transaction to happen. You're the only person looking out for you.
posted by Dashy at 2:42 PM on February 25, 2015 [4 favorites]

Response by poster: the seller is paying closing costs.

Our realtor has been terrible throughout this process but that's another story....
posted by Librarypt at 3:01 PM on February 25, 2015

I don't know if it's like this everywhere, but here in Oregon the appraisal is paid outside of closing so you'd be on the hook for both appraisals.

I would absolutely not pay money or spend time trying to get it to appraise higher. ESPECIALLY don't use an appraiser suggested by the seller, no no no. Instead you should be negotiating the price down at this point.
posted by rabbitrabbit at 3:13 PM on February 25, 2015 [1 favorite]

Our realtor has been terrible throughout this process but that's another story....

Realtors work for brokers, get the broker involved. Tell EVERYONE that you're walking away from the deal unless they all bust ass to make you change your mind. And after they bust their asses, they should be kissing yours.

Call your realtor and leave a message, "Carly, we just got the appraisal and it's $40,000 less than our offer. We'd like to prepare the paperwork saying we're not executing on the contract. Please get with us ASAP, or we'll go to the broker because we want to be within the due diligence deadline."

WATCH how fast everyone springs to life.

You do realize that if the appraisal doesn't come in for the amount of the mortgage that you can walk away...right?
posted by Ruthless Bunny at 3:13 PM on February 25, 2015 [4 favorites]

What do you think the actual value of the house is? Is it the contract price? Or closer to the appraised value? Somewhere in between? Even if they meet you halfway you will have to come up with a lot of cash to make up the difference to your lender since they will only write the loan based on the appraised value - cash that you could use as part of a down payment on a more expensive but properly valued house if you wanted to..

I'd walk away unless you think the first appraisal is just totally wrong. It can happen.
posted by kris.reiss at 3:46 PM on February 25, 2015

It sounds like your realtor, the selling realtor are conspiring together to get you to pay more for the house than it was appraised for.

Fuck that.

It also sounds like your lender is not involved as they are trying to move you to a new lender. DO NOT switch to the new lender if you're happy with yours. Have a meeting with your lender and raise the basement issue. If they assure you to your satisfaction that the appraisal was done correctly, then follow ruthless bunnu's script above.

My first realtor pulled this shit. It was laughably obvious that my mortgage broker had shared my financial info with my realtor AND the selling realtor. I walked away and got a new realtor, who also sucked actually, but I bought a much larger better house for less money so there's that.
posted by fshgrl at 4:50 PM on February 25, 2015 [3 favorites]

This sounds weird. I would just walk, and get a new realtor too.
posted by Slinga at 5:26 PM on February 25, 2015 [1 favorite]

I had my license eight zillion years ago. I was also going to suggest walking away from this deal because it's obviously over-priced and you are getting very very bad advice if you're being encouraged to help the seller solve their over-priced house problem.

Seriously. There is a better house and a better deal out there. Guaranteed.
posted by jbenben at 7:47 PM on February 25, 2015 [5 favorites]

I recently sold a house and bought another. In both cases the appraisers were -- I wouldn't say "corrupt" but perhaps "complicit" in an obviously corrupt process. If the appraiser isn't coming in at the selling price, I'd take two steps back and be very, very sure that you aren't overpaying for the place, rather than shopping around for a more compliant appraiser.

What happens if because of work or family issues you have to sell the house a year from now and it again appraises for $40k less? You don't want to be the person holding that bag.
posted by Dip Flash at 8:45 PM on February 25, 2015 [3 favorites]

This should not be too difficult to solve.

I am a real estate investor. I currently own 28 homes, closing on another next week. I have lots of experience buying and selling, and have been involved in a few really weird deals.

1. Call your county property appraiser's office. There is no mystery about what is taxable and what is not - the clerks at the PA office will be happy to help. In fact, you should be able to look up the property online at your county property appraiser website, and a clerk should be able to walk you through what is taxable. Do not rely on a realtor for that answer. Go to the source, get the answer for yourself. If you post the county in Maryland, I can post the phone number to the PA's office and the address search on the website. Tax issues are public info. Do the leg work and get to correct answer.

2. If there is a dispute about the appraisal, come practice is this: you get one, I get one, we have the original one - and we take an average. If you allow them to select an appraiser, and that number is wildly different from the first appraisal, and you just accept that - you are damn fool.

Buying a house is often the single largest financial investment people make in their lives. I am sure that this is among the biggest financial decisions you will ever make. Yet, people always buy houses based on emotion. The garden is lovely, and the front window has a beautiful view. STOP THINKING EMOTIONALLY. Start thinking business. Business only. You are selecting a mutual fund option - that is the kind of mind-frame you need here. Cold, calculating, business.

Would you place your money in a mutual fund where an independent appraiser said its return is less that the broker claimed? So, why are you even be thinking about that with a real estate investment?

Personally, if I were you, I would walk. If they come back, the price needs to drop. Or, if they insist the appraiser was wrong - then THEY PAY for YOUR APPRAISER to do another one.
posted by Flood at 8:48 AM on February 26, 2015 [3 favorites]

Flood has the right attitude. Remember that most of the participants in this deal benefit the larger the sale price is. What I can't tell from your post is what you think the house is worth. I would think that you have to get that straight before you bother with trying to get a higher appraisal on you dime. If you were paying cash and an appraiser told you the asking was 40,000 over market what would you do?
posted by Pembquist at 9:43 AM on February 26, 2015 [2 favorites]

Appraisals are a horrible, disgusting racket. When I bought my house, the first appraisal came in well over the contract price, but with repairs called out; however, the bank said they still would not make the loan even if the repairs were done (WTF!!!!). So I switched banks, and the next appraisal mixed up my extremely lowball initial offer and the contract price and used the much lower of course the appraisal came in way short, much lower than the first one, and lower than the contract price. I called them on it, but they refused to reappraise or change the results--they just resent out the appraisal with the contract price corrected without it affecting their valuation of the property. Really, if appraisals were clean, the appraiser shouldn't even KNOW the contract price! They should just look at comps. The whole thing was terrible, we were under contract for nearly four months, the seller nearly walked (multiple times), and I nearly lost the house (multiple times). We ended up splitting the difference: the seller lowered the price a bit and I came up with more cash.

Through sheer dumb luck I managed to buy at the bottom of the market (late 2011), and my house is worth quite a bit more now, so it worked out for me, but obviously real estate is much different now. Feel free to memail me if you want specifics.
posted by Violet Hour at 1:44 PM on February 26, 2015

Response by poster: Thanks everyone for your help. I ended up getting a mortgage broker to help me find a new lender unaffiliated with the seller's agent. Currently trying to get the seller to pay for the second appraisal. What a mess.
posted by Librarypt at 1:07 PM on March 9, 2015

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