What condo buyers need to know about appraisals

During the underwriting process, your lender will order an appraisal of the condo to determine its fair market value.

Lenders conduct an appraisal to ensure the unit is worth the asking price. The buyer pays for it, usually around $500. If the condo is worth less than the sales price, a lender will not extend a mortgage unless someone makes up the difference. You’ll have several options to keep the deal alive.

Here's what you should know about appraisals and how to prepare for them:

Provide your lender with condo-specific documents

Notify the lender as soon as a seller accepts your offer so they can initiate the appraisal process.

An appraisal for a condo is mostly the same as the ones conducted for a single-family home or a townhouse, except that an appraiser will want to review the community's homeowner association documents, said Mike Brunson, CEO of appraisal litigation firm Validox.RED in American Fork, Utah, and a board of directors trustee for the National Association of Appraisers. They will want to know whether there's any litigation involving the condo community or its reserves.

They also will want to know whether there are any restrictions on the use of the condo, such as renting it out, or whether there are any special assessments, he said.

The management of an HOA has a lot of impact on appraised value, said Chad Barker, the CEO of Velox Valuations in Greenwood, Indiana.

"You could have two identical condos in terms of square feet, bedrooms and amenities, and those can appraise quite differently if they are across the street, based on how an HOA is run," he said. A poorly run HOA will typically result in higher HOA dues, he said.

Other factors driving down value are the percentage of residents who are tenants renting from the owner and how close the condo community is to its total development, he said. Communities that have lots of tenants and are far from full development can be less stable in value, he said.

You can prepare for the appraisal by obtaining a copy of the documents a lender needs to make this assessment. These include the HOA’s:

Bylaws
Budget
Reserves
Insurance
Special assessments, current and future.

A lender also will need to know about the exterior condition of the building that houses your unit, as well as the community’s roads, parking lots, common areas and amenities. The faster you provide these documents, the quicker your appraisal will be completed. The appraisal typically takes one to two weeks from start to finish.

What happens if the appraisal is lower than the asking price?

You have several options should the appraisal come in lower than the expected asking price.

The first thing you should do is check the appraisal for accuracy. It’s possible that the appraiser used wasn’t experienced, especially in valuing the area where your condo is located. It doesn’t hurt to double-check their math and make sure they took into consideration the different amenities or features between the community where your unit is and one nearby. Your real estate agent can help you determine how accurate or inaccurate this was.

If an appraisal contains errors, you can hire a second appraiser and have them redo the report. If so, ensure they are as experienced as the first appraiser and are familiar with the condo market, particularly your specificcondo community.

If the appraisal comes in below the asking price and is accurate, you or your seller will need to make up for the difference between the appraised value and sales price. You could propose paying a new, lower price for the unit. You could also pay some or all of the difference in price.

Perhaps the owner is so eager to sell the unit that they will pay the entire difference. A good indicator is how long the unit has been on the market. The longer it has, the more likely it is that you have leverage to negotiate.

No matter what option you choose, make sure to inform your agent as soon as possible to plan your response.

How an appraisal differs from an inspection and tax assessment

An appraisal and home inspection both investigate a property, but there are some important differences. The lender orders the appraisal to determine the market value of a unit. It looks beyond the structural condition of the condo to consider the community’s amenities, condition and location.

An inspection focuses on the four walls of your unit and the space within it. Its purpose is to identify flaws for repair, not to determine its market value. An inspector may take an informal look at the exterior structure of the unit’s building but will not consider location.

An appraisal also differs from the assessment a municipality makes on a property to determine property taxes. An assessment is more general, getting a rough value of a home’s worth to determine property taxes. The assessment is often below market value in part because it makes the property tax more affordable to the owner.

A private appraiser does the appraisal, while a local government official conducts the assessment. An assessment usually is done once every few years, while an appraisal is conducted when the home is listed for sale. Assessments usually don’t focus on the condition of a home.

Make sure you have an appraisal contingency

Every purchase agreement should have an appraisal contingency that lets the buyer cancel the sale or negotiate a new price if the unit doesn't appraise, said Harvey Jacobs, an attorney with Jacobs and Associates in Rockville, Maryland.

However, if the buyer proceeds with the purchase, the Federal Housing Administration will associate the appraisal with the property for any future buyers. This may hinder a sale in the near future if the unit hasn't appreciated.

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