Okay, couple words here about how appraisal of real estate works. Yes, I work for an appraiser and have been in the business, off and on, for twenty years.
An appraiser looks at a house and makes a determination, based on the recent market activity of similar houses, of what that house is worth. The real estate market goes up and down and appraisers are only allowed to go back a certain period of time (nine months where I am) to gather comparable sales. We have a similar issue right now in our market in that houses that sold last summer were priced a lot higher and valued higher than the exact same house would be this year–because the market is no longer red hot and prices have fallen quite a bit. The appraiser is only redacting the marketability of a house based on what the actual market is doing.
Also, a common misperception is that “putting money into a house” will automatically increase the value. It’s true that SOME things will automatically raise the value–adding a bathroom, remodelling a kitchen, adding a room (as long as the work is done with permits and can legally be considered as an addition to gross living area) or finishing a basement. However, it’s not a one to one ratio of dollars spent to equity increased, not by a long shot. Spend your money putting in bright purple carpeting and you might as well flush it down the toilet–just because YOU love bright purple carpeting does not mean the market agrees with you.
Other expense items such as replacing a water heater or a roof or a furnace may make your house more marketable, but will not increase the APPRAISED value, necessarily, as a functioning water heater, roof and furnace are considered to be things which are necessary to the house MAINTAINING value, but don’t actually increase that value unless you went over and above–say replacing a comp shingle 20 year roof with a fifty year metal one, or putting in a tankless water heating system, or replacing baseboard heaters with a forced air whole house system.
There’s also the issue of putting too much money into a house until you actually improve it to the point where it’s too good for the neighborhood–a million dollar house in a hundred thousand neighborhood is NOT going to appraise at a million dollars, whereas a hundred thousand house in a million dollar neighborhood will have its value increased due to its location–although not up to a million. The value there is in the POTENTIAL for putting a million dollar house on the land that happens to be in the right place.
You also mention that your buyer is going for FHA financing, which opens up a whole new kettle of worms–to hash a metaphor. FHA appraisals are a big fat pain in the ass for the appraiser as well as the buyer and seller because of the endles picky ass stuff the government requires the appraiser to note and thereby requires the seller to take care of–my favorite is that if you have any bushes or landscaping plants touching the house at any point you have to remove them before the appraisal is approved and the house can be sold. If you want to see this pain in the ass for yourself, go to the HUD appraiser site here and scroll down the page to the link marked “valuation protocol.” Warning–it’s a 4.5MB Word file detailing all the picky shit an appraiser is supposed to check on your house in order to do an FHA appraisal.
Many, MANY appraisers flatly refuse to get rostered with the FHA, because they don’t get any more money for an FHA report but they do have to work a lot harder, including having to come out again to check on any conditions they noted to make sure they’ve been done before the report can be signed off. You know, making sure you trimmed that bush that was brushing the paint. This means the appraiser has to make another trip that he/she doesn’t get paid for–and time is money to an appraiser. Also, FHA appraisals are subject to a lot more scrutiny than a regular loan, and Og help any appraiser who doesn’t comment on the stupid stuff at your house and the report gets pulled for a field review. If the appraiser didn’t comment on your brushing bush, the report gets kicked out and a complaint gets made to the licensing board, which is at minimum a huge pain in the ass and at maximum a complete loss of all revenue forever and the appraiser gets to find a whole 'nother job to do.
I don’t know the specifics of your particular appraisal, but I hope this makes at least a few things make more sense regarding what’s going on with your house. My best advice? Stick with buyers who can qualify for standard loans and fuck FHA!
I know, you don’t have any control over who your buyer gets finanacing from!