Do I Need a Pre-Purchase Appraisal?

What is a pre-purchase appraisal?

Pre-purchase appraisalMany of you may have read my posts in the past about pre-listing appraisals but this is the first time I’ve written about the pre-purchase appraisal. They sound similar but are they? Let me explain what they are and why I’m writing about them.

A pre-purchase appraisal is not done for the same reason as a pre-listing appraisal. A pre-listing appraisal is one that is done by the seller or real estate agent in order to come up with a price to list the home based on recently sold homes and current listings. It is done so that the home is priced to the market in order to help it sell for the most amount of money in a reasonable amount of time.

On the other hand, a pre-purchase appraisal is done for the benefit of a buyer to make sure that the price being asked is reasonable and in line with what other homes are listed at and sold for. A pre-listing appraisal is primarily done for the benefit of the seller, however, it can help the buyer as well. If one has not been done then a pre-purchase appraisal can help buyers make a more informed decision.

 

When is a pre-purchase appraisal appropriate?

First off I want to tell you why I decided to write about the pre-purchase appraisal. I recently had a discussion with an agent who stated that they let their sellers set the asking price and they’ve never had an issue with low appraisals. This was one particular instance in which they did have a problem with a low appraisal and the reason for the discussion.

While this type of situation is not indicative of how all agents conduct business it is possible that the price being asked for a house is not always arrived at by using recent comp sales and listings but rather is based on what someone arbitrarily wants to get for their house. Sometimes it is in the best interest of the buyer to verify the accuracy of an asking price by getting their own appraisal, which is why I’m writing about this now.

I’ve written in the past about the importance of cash buyers getting appraisals before they purchase a home. In addition to cash buyers, anyone questioning the asking price or physical attributes of the home would be a good candidate for a pre-purchase appraisal. If you are a buyer and you’ve looked online at other recent sales and things just don’t add up with the home you want to buy then the pre-purchase appraisal will help you sort things out.

Some FSBO (For Sale By Owner) sellers do not have accurate information about their home because they themselves have not done the appropriate pre-sale work such as getting their own appraisal or verifying the square footage of the home. Accidental misrepresentation of the square footage of a home is not uncommon. Tax records, where many sellers get their square footage information, is wrong most of the time.

In situations where an agent is involved, and the price was set by the seller rather than the agent performing a CMA, a pre-purchase appraisal is a good investment. It can help you reassert your belief that the home is overpriced and may convince the seller to lower the price, which will save you money.

Question

Do you have any questions or comments about the pre-purchase appraisal? I’d like to hear from you so please leave a comment below and let’s keep the conversation going. As always, thanks for reading.

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Comments

  1. I find many tenants buying from their landlords will get a pre-purchase appraisal to help establish a reasonable selling price (or at least negotiate). The owner might offer a certain price, but the buyer (tenant) wants to understand what value really looks like. I find it’s best to have the owner and tenant on the same page about ordering the appraisal first though so as not to infuse any contention in the potential transaction. If it can be smooth, it’s just easier to negotiate.

    • I never thought about the tenant/landlord scenario, Ryan. That is a good point though about having them both on the same page so that the process goes smoother.

  2. Great article Tom! There is a lot of value in having an appraisl completed for cash buyers and FSBO’s. I might also add that if a borrower qualifies for a PIW (Property Inspection Waiver) it is still advisable to have an appraisal completed just to make sure they are not borrowing above market value.

    • You’re right, Jamie. I did not touch on PIW’s so I am glad you brought it up. It’s interesting to note that there is no recourse against Fanniemae if they say you qualify for a PIW, you purchase the home, then you need to resell and can’t get what you paid AND they said it was worth. “Buyer beware” is really applicable here.

  3. Everyone talks about CMA. In your opinion, what are the parts to a good CMA? Appraisals are the best as interior and exterior and upgrades are taken into account. CMAs relies on external data

    • A CMA is done by the real estate agent and it is my understanding that an interior inspection would be done since they will be selling the property and have already looked at. Since the CMA is done by an agent it does not go into as much detailed analysis as a full appraisal. A lot of agents will price a home based on price per square foot, and while this can be used in certain situations it should not be the only value indication you should use. Square footages could be wrong and also the sales may show a wide range of price per square foot and if that is the case then your price range is going to be very wide, which does you no good in providing a reliable asking price.

  4. Pierce Blitch III IFAS says:

    WOW!!! This hits close to home today. I am doing a pre-purchase appraisal for a Cash buyer coming in from a different city. The listing/selling agent are the same and suggested that the buyer get a pre-purchase appraisal. The GLA used in MLS from the Tax Assessor was 2194 sf. My measurement was 1766 sf. This is a split level and Tax Assessor added 8′ of porch to the full measurement across the at grade level 2 and also did not take into consideration that level 1 (yes it is partially below grade and classified as basement) has approximately 30% that is actually additional crawl space. The Appraised value is considerably lower that the current contract price.

    • It’s situations like this that a pre-purchase appraisal is really needed. The out of town buyer is not familiar with the market and the square footage is off. Not getting an appraisal would have resulted in them overpaying for the home. I’m sure the investment in an appraisal is well worth the cost. Thanks for sharing, Pierce!

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