A Georgia Appraiser’s Perspective on Irreconcilable Defects

on 11 December 2014

My partner Terri recently wrote a blog about irreconcilable defects on a home, and Kelly, one of our five-star real estate agents in Roswell, GA recently wrote one specifically about her experience listing a property in proximity to power lines.  Their vantage points were those of the impact such defects had on their ability to market homes for sale.  

We also had Tim from on our sales steam, a licensed real estate appraiser in Milton, GA whose views supplemented those of Terri and Kelly and I wanted to share his perspective with you.   

Most consumers acknowledge the, oftentimes unfair, marketing stigmatism homes are harnessed with when it comes to some irreconcilable defects.  But the perspectives of appraisers and lenders must also be considered along with any marketing stigmatism whether real or imagined, involving external negative influences.  Astute appraisers will mention in their appraisal reports the presence of all such external defects that include things like high tension power lines or proximity to busy highways.  Most appraisers will deduct some amount from the home’s value for these features.  This practice surely impacts the closing sales price.  But what real estate agents often overlook, and should not, is that this could also possibly adversely affect a buyer’s ability to even obtain financing for the purchase, regardless of the agreed sales price.

The first concern is whether the power lines are within the fall-distance of the house.  If a storm should knock over the tower or pole supporting the lines, the lines could fall on top of the house resulting in fire or other hazards.  If the loan underwriters detect the appraiser’s comments on the appraisal report they might deem the property (not the borrower) ineligible for financing.  That’s a big deal!

Even if the power lines are found to be outside of the fall distance, underwriters might still turn down the appraisal (thus the loan application).  This is because the stigma still exists. Appraisers cannot ignore the impact of it on the home’s value.  A deeper problem for appraisers is that they often cannot show exactly how they derived the dollar amount for their negative adjustment in the report.  This is because appraisers are often reduced to simply guessing about this cost.  They know the negative influence will affect the true value for certain, but they usually lack sufficient market data to draw an empirically supported conclusion. 

To complicate matters even further, if the home has a negative external influence, and an adjustment has been made for it in the appraisal report, underwriters often ask for a field review of the appraisal by a different appraiser.  When the second appraisal comes in with a substantially different value, the problem often results in a time consuming back-and-forth because the two appraisers are professionally compelled to defend their varying judgments.  This debate could consume weeks of time to resolve to the satisfaction of the underwriter.  Meanwhile the sales transaction is stuck on hold.  This is something both listing and selling agents should consider when negotiating the due diligence contingency and the contract closing date.  Both buyer and seller need to enter the transaction with eyes wide open.  

I’m not saying one should never buy a home with an irreconcilable defect, but the buyer had better understand what they are doing and proceed with caution if they want to protect their investment.  If you have not read Terri’s and Kelly’s blogs you might want to check them out too.  Bit no matter if you live in Roswell, Milton, Alpharetta, Johns Creek, Woodstock or any other Georgia municipality, this is an essential understanding.

Daniel R. Wilhelm
Roswell, Georgia
Executive Broker
3 Options Realty, LLC., CRMC®, The Green Broker
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The author of this Blog is neither an attorney nor an accountant.  Nothing written should be construed as legal advice.  Conclusions conveyed are outcomes based upon practical experience and should not be depended upon to be a common outcome of other similar circumstances. Consult with a professional before making tax or legal decisions.