When is a preliminary property appraisal required before buying a home?

A preliminary property appraisal is especially recommended when there are question marks about the legal or structural condition of the property — for example, unpermitted construction, encroachment on public land, or major renovations. Discovering problems too late can cause the real estate valuer's assessment to come in well below the purchase price.

What is a suspensive condition in a home purchase agreement?

A suspensive condition is a clause stating that the contract takes effect only if and when a certain future event occurs — for example, getting mortgage approval from the bank. If the condition is not met, the contract is void and the parties are released from their obligations.

How does the bank determine the property value for a mortgage?

The bank sets the property value for the mortgage at the lower of the purchase price and the real estate valuer's appraisal. If there is unpermitted construction, the valuer deducts the cost of fixing it from the value. A deduction of more than 20% of the purchase price can run into serious problems in the bank's legal department.

D: The Cost of Skipping a Preliminary Property Appraisal

Here's the Situation

Brigitte Bardot was buying a luxury apartment in Tel Aviv. She came to us to guide her and build her a mortgage mixture that would let her keep up her lifestyle. The process was going smoothly — we built a mortgage mixture and negotiated hard with the banks until we reached an agreement with a single bank on an offer that fit her needs. Alongside the bank negotiations, Brigitte was pressing ahead with her own negotiations with the seller.

On Saturday afternoon, one day before signing the purchase agreement, Brigitte messaged us to say there were problems and we needed to talk. She told us she'd discovered significant unpermitted construction in the apartment, done recently during a renovation the sellers had carried out.

During the mortgage process, as part of the collateral stage, a real estate valuer assesses the property's planning and legal condition. If the valuer finds unpermitted construction and/or encroachment on public land, they calculate the cost of restoring the property to its lawful state — and deduct that cost from the value they assign to it.

Where can a problem arise?

The bank sets the property value for the mortgage at the lower of the purchase price and the real estate valuer's appraisal. From that value, the bank works out the LTV percentage you'll be granted on the mortgage.
Monthly Report on Housing Loans - Directive No. 876, Section 14

Beyond that, in our experience, a deduction of up to 20% off the purchase price will be accepted without much fuss, but anything larger can run into serious problems in the bank's legal department.

We asked Brigitte whether she'd had a preliminary property appraisal done, and the answer was no. With no way to push back the signing date to fit one in, we asked to insert a suspensive condition clause into the contract.

A clause stipulating that the contract takes effect only if and when a certain, uncertain future event comes to pass. As long as the condition hasn't been met, the contract exists but is "dormant" — the parties are bound by it but aren't required to fulfill its main obligations.

If the condition is met, the contract takes effect.

If it becomes clear the condition can't be met, the contract is void.

In this case, we asked that the purchase agreement be canceled if Brigitte couldn't get a mortgage because the bank wouldn't approve the property on planning grounds.

What was the mistake:

Brigitte's attorneys should have insisted on adequate protections for her. A preliminary property appraisal is expensive and not always necessary, but in cases like this one, it's a must.

Another protection that was missing was the suspensive condition. Had no bank agreed to grant Brigitte a mortgage (unlikely, but possible), she'd have been in financial breach with the seller — a situation with heavy financial consequences.

Conclusions:

If you're buying a property with question marks over its legal status, don't skip the preliminary property appraisal. Talk to your real estate attorney, and don't hesitate to put a suspensive condition into the purchase agreement to protect yourself.

Good luck!

*Nothing written here should be construed as legal advice of any kind.