You are here: Home » 2017 » April


Many people use dollar per sq. ft. as the “gold standard” when valuing a home. However, I’ve found that it isn’t nearly as accurate as they think.


The biggest challenge is that it doesn’t account for condition, location or upgrades from one home to the next. An immaculate home on a large lot at the end of a court with a pool, granite slab counters, and hardwood floors will be a LOT more per sq. ft. than the same floor plan in poor condition with no upgrades and on a busy street.


Another challenge is that it is difficult to compare homes of drastically different sizes. Smaller homes tend to have higher dollar per sq. ft. values compared to a larger home. This is because you still have the lot, the utilities, a kitchen, etc., no matter how big the house is. There are many fixed costs, and have larger impact on the value of a smaller house.


The other issue that makes dollar per sq. ft. confusing is that there is only an incremental difference in value between two homes of similar size. Most appraisers tell me that they will only give a value of between $40-60 per sq. ft. to compare two different homes, even though it may have cost $200 per sq. ft. to build the whole house. For example, if you were comparing two homes, one at 2100 square feet, and the other at 2350 square feet, the difference is 250 square feet more. An appraiser may only give the larger home about $12,500 more for the size ($50 X 250), not $50,000 ($200 X 250).


This doesn’t mean you should completely ignore dollar per sq. ft., but it’s only one factor to consider among many, and it works best when you are comparing homes of similar size and location with similar upgrades and amenities.


I’ve had sellers tell me they would MUCH prefer a 20% down buyer over a low-down payment buyer because the 20% down buyer is more likely to close and we will have less problems if the appraisal comes in low. This may or may not be true. What if the 20% down buyer is scraping together every penny they have to come up with the 20% plus closing costs? If the appraisal does come in low, they simply don’t have the funds to make up the difference. Their lender may also be concerned about their “reserves” (cash in the bank after close of escrow). And then let’s say that the FHA or VA buyer has a boatload of cash sitting in the bank, they are just choosing to go with the low-down options for other reasons. In that case, if the appraisal comes in low, it’s actually the FHA or VA buyer that would have the funds to make up the difference if they choose to.


Now, if the buyer approved for a 20% down loan is actually putting 30-50%+ down, THEN I would agree that that buyer is probably much stronger than a low-down payment buyer. Their lender is willing to make them a loan for 80% of the appraised value, so in their case, if the appraisal comes in low, they can still complete the purchase and may not have to come up with any more funds than they were already planning to.


The moral of the story is that you need to look at ALL the facts before you turn away the FHA or VA buyer to go with the 20% down buyer. I’m more concerned about which buyer has more funds BEYOND what the lender requires, and how strong their approval status is.


Last week I wrote about when the appraisal comes in lower than the agreed-upon purchase price and the buyer has an appraisal contingency. It is possible to file an official rebuttal of the appraisal to plead your case. This also true if it’s an appraisal for a refinance.


The key is to stick to the facts and make your case through sound reasoning and evidence. You can’t just say, “It’s too low!”. For example, I had a recent one where the subject property was smaller than the last three solds, and the appraiser deducted for the size difference at $150 per sq. ft. I was able to argue successfully that I normally see appraisers adjust at $40-60 per sq ft. I provided print-screens from many other recent appraisals to bolster my case. I also had one where the appraiser used sold homes from 6 months ago, yet made no adjustment for the market appreciating over that time. I was able to provide reports from a neutral 3rd party source showing how much our market had increased over that time.


I’ve written MANY appraisal rebuttals over the years and unfortunately even when I believe I have the facts on my side, the value is adjusted less than half the time. As a last resort, sometimes another appraisal is ordered and hopefully that one comes in more accurately. [NOTE: This is NOT an option if the buyer is applying for an FHA loan because FHA tags the value to that property so you are stuck with it for any FHA buyer for the next 6 months.] If a second appraisal also comes in low, then either the seller needs to come down on their price, and/or buyer needs to agree to pay more than the appraised value, which may or may not mean increasing their down payment.

Return to top of page

Contact Us

  • Sharp Realty
  • 320 Fairview Ave.
  • Brentwood CA 94513
  • P: 925.240.6683
  • F: 925.524.2302
  • E: info@SharpHomesOnline.com
  • DRE# 01858431