How to challenge that low appraisal
A low appraisal can prevent you from buying or selling a home at the price you have negotiated. Here's what you can do about it.
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In the volatile real-estate market of the past several years, prospective homebuyers and refinancers have encountered the same frustrating obstacle: a low appraisal.
Appraisal complaints have risen in recent years, particularly since home values began plummeting in 2007 and the Home Valuation Code of Conduct took effect in May 2009. But the experts say this isn't the first real-estate cycle in which contract prices don't often match an appraised value. (Bing: When was the Home Valuation Code of Conduct eliminated?)
"Everyone needs to understand that real-estate appraisers report the market; we don't make the market," says Sara Stephens, president of The Appraisal Institute and principal of Richard A. Stephens and Associates in Little Rock, Ark. "We gather information, analyze it and make a report."
Why appraisals can come in low
A low appraisal is not necessarily wrong, but it does create a situation in which a lender may not approve the loan. Simply stated, appraisers compare the value of a home with the comparable properties, or "comps," in the surrounding area.
Buyers and refinancers often run into trouble when lenders use an appraisal management company to hire an appraiser who doesn't know the local nuances that could affect home values. In markets plagued by foreclosures or short sales, the surrounding comps can weigh down the price of a home in good standing. Or, if there have been few home sales in a given neighborhood, appraisers may be forced to look for comps in surrounding areas where market conditions and the homes may be different.
"Appraisals are a moving target and are based on closed sales, which can be a problem when there are few closed sales to use for comparable properties," says Carole Short, a sales associate with Coldwell Banker Residential Brokerage in Dunwoody, Ga.
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While homebuyers and homeowners cannot control a property appraisal, they can influence and challenge it if need be.
Educate the appraiser
"I recommend that [real-estate agents] and homeowners prepare written materials for an appraiser that include information about home improvements and anything else they know about the property that can improve its value. This can improve the chances for a higher appraisal," says Amy Tierce, regional vice president for Fairway Independent Mortgage in Boston.
Stephens recommends that sellers be present at an appraisal. While lenders are held at arm's length and cannot directly communicate with an appraiser, real-estate agents, buyers and sellers are allowed to talk to the appraiser. Agents can present the appraiser with information on comparable sales and how they came up with their sale price.
How to challenge a low appraisal
An appraisal dictates how much money lenders are willing to lend to a borrower. If a home's value is determined to be less than the preapproved loan amount, the lender cannot approve the loan. Buyers have the following five options when challenging a low appraisal:
1. Cancel the contract. Short says that almost all sale contracts today are written with an appraisal contingency that allows buyers and sellers to cancel the contract if the appraisal comes in too low.
2. Negotiate a new deal. "Buyers are allowed to challenge a low appraisal, but usually they prefer to renegotiate the contract," Short says. "A lot of buyers are actually excited if an appraisal comes in for $20,000 less than they offered because they assume they can negotiate to buy the house they want for less money." But that's only if sellers are willing to accept the lower price, which many times they're not.
3. Pay extra. "Every negotiation is specific to the individual circumstances of the contract, how much the buyers want the house and whether the sellers are willing to drop the price or assist with the financing," Short says.
- On our blog, 'Listed': Home sales slip but are up over last year
Not all sellers are willing to negotiate, however. So sometimes after an appraisal comes in low, buyers must pay additional cash in order to meet the agreed-upon sale price. Tierce says negotiations should be as creative as possible, including seller financing or other concessions.
4. Challenge the paperwork. Stephens says the individual who pays for the appraisal, typically the buyer, can request a copy of the appraisal and review it. Short says real-estate agents and buyers would need to provide additional facts about comps or point out mistakes regarding such items as the number of square feet or the number of bedrooms.
"You should check the comps to be sure they have geographic relevance and the same interior and exterior features," Stephens says. "You can also hire another appraiser to do a review of the appraisal for an additional cost."
- MSN Money: What if the appraisal is too low?
5. Request a second appraisal. "If a challenge or a review doesn't change the appraisal, then a buyer can ask their lender to hire another appraiser," Stephens says. "Be sure to request someone with geographical knowledge and someone competent and explain why you are asking for a second appraisal."
Short says either the buyer or the seller can challenge an appraisal or even request a second appraisal. "A challenge should be based on specific errors rather than opinions."
Anonymous 18: I totally understand your point. If there is language in your appraisal stating that the appraisal value is based on Fair Market Value, that is, what a willing buyer would pay for your house, and the low-ball appraisal cost you the full-price-offer you actually got, I would SUE the appraiser for "tortious interference of a contract." In my view, the appraisal was the cause of you not being able to sell your home to a willing buyer at the price you had agreed on!
I also experienced something similar this summer while trying to re-fi my condo. When I bought the condo, it was a short sale. I put about $60,000 in renovations, including a new kitchen and two new baths. The appraisal was about $200,000 when I completed the renovations less than 1 year ago. When I tried to re-fi, the appraisal came in at only $175,000 because that's what an un-renovated unit sold for!
I challenged my appraisal to no avail. I think the whole appraisal thing is a scam to protect the lender and I agree that low-ball appraisals are hindering the housing recovery.
Appraisals are simply a form of a sham treating real estate as a commodity. Best example, I have seen new home appraise below the cost to build them. That is simply wrong and there is no logic behind it. Try that with a new vehicle which just rolls of the production line and I would not get off first base. Try regulating new cars as a commodity with appraisals to justify the purchase price and it would never pass law. I would concede there is a used car structure however; the pricing matrix is a little better defined with book values and not at the whim of an appraisal before getting a loan.
In Texas you never have to worry about having a low appraisal. They (all taxing entities) have learned thats how they make their money. People who are payed from the tax payers are the only ones making cost of living raises. They gouge us what seems illegal in Texas. School taxes are just at 50% of our tax burden. What is really confusing is taht Texas is run almost entirely by Republicans from the Govenor to the dog catcher. Republicans say they are for lowering taxes, but that is not true, as it is raised every year by cities, college, county, roads and bridges, car tags, fees etc. People who work for a living don't get raises anymore, people on fixed incomes struggle, but folks who get paycheck from taxes get all the benifits.
Seems like Republicans are Conservative until they want a pay raise, then they are very Liberal.
Well that's all fine and well if you're the SELLER and WANT a high appraisal, but if you're a BUYER, especially one buying from a BUILDER like we did then you want a LOW appriasal.
The "Base price" of a house includes the basics, like cheap carpet and linoleum. Builders know the women won't like these features and will want to "upgrade" them. They offer "incentives" knowing that the women (the person making the decisions) will choose to "upgrade" the linoleum and ugly basics thereby raising the appraisal. The PRICE they charge for these upgrades like flooring is actually MORE than it would cost you to just hire someone to replace the floor.
So. . . . use your incentive money to put things in the house that are expensive, and hard to add after a build, and that don't add value to the home on an appraisal: We added central vac, top of the line appliances, including washer/drying multi-oven stove, convection microwave, trash compacter dishwasher, 7.2 surround sound in the living room ceiling/walls etc. Order the most expensive and use the "incentive money" to buy it. A house with a basic stove appraises the same as a house with a 5000 dollar stove. - It has a stove, that box gets checked, they move on.
When it comes time to close, if the appraisal comes in LESS than what you signed and agreed to buy the house for, the "contingency clause" will cause THEM to HAVE to find the financing FOR you or lose the sale. No lender will lend them more than the appraisal. We signed to buy a 318,000 house. It appraised for almost 100,000 less because all the "comparables" were built using jumbo-loans and the women decked them out in tile, hardwood, and granite. Compare that to a house with LINOLEUM? yeah it has to be worth LESS, that DOES affect the appraisal. You soon find living in the house that the current floors are fine. We have replaced some rooms with hardwood, and will eventually get to them all, but why pay twice for a floor?
Think about this - You can't ever have price appreciation without an appraisal above market. Cash buyers usually demand a discount so every purchase that can lead to price appreciation is financed and needs an appraisal. Current regulatory (HVCC) and secondary market underwriting guidelines make price appreciation impossible in almost every area except cash investor feeding grounds like Phoenix and some parts of Florida. Unless this is remedied, America's net worth will remain in the toilet. This is hurting all of us.
Mr. Morgan, I fail to see in the article anything that isn't legal, and I do not agree with the premise that buyers and borrowers have no recourse against a poorly written appraisal. While you and I may not put out that kind of work, there are some less than quality folks that really need to step out of the business.
Scott: You have your information incorrect. The HVCC and now the Appraiser Independence section of Dodd Frank prohibits those benefitting from the closing of the transaction from selecting the appraiser, and from influencing the appraiser. The loan production staff in other words.
Lenders have taken the safe route and simply said we can't speak to the loan production staff. There is no such law that states we can't speak with the lender staff at all.
Agents, homeowners, etc. are prohibited from coercing the appraiser, but we have to speak to one another often times. For cripes sake, how you gonna set up the inspection appointment??!!
You're not a, "WALK"?! What the **** does THAT mean?! Don't senior citizens know how to PROOF READ?! You spent $150K that got you back $25K?! Oh MAN! You're right. You're NOT a walk. You're a MARK! Wanna buy a BRIDGE?! Ha ha ha ha ha ha ha ha ha ha ha ha!
I don’t believe I’ve ever seen an article that’s this misleading. The buyer may be paying for the appraisal but the lender is the one who employs the appraiser and in doing so is the appraiser’s client and the only one the appraisers is allowed to even discuss the content. The buyer can never challenge the appraiser. They are not the client. There are very strict laws dealing with confidentially. Appraisers can and have been fined, lose their license and serve prison time for disclosing anything on the appraisal to anyone except the client. The buyer can receive a copy of the report from the lender but never direct. As far as making a list of improvements done to the property, an appraiser knows what to look for in that property that may add to or take away from the value. I’ve had home owners tell me things like, “I just installed a new roof and you didn’t give any value to it.” My answer is always, “Did you just have money laying around that you couldn’t find another use for or did your house need a roof?” Over improvements are another item people other than appraisers don’t understand. If you install gold bath fixtures to a home in a neighborhood where other houses don’t have gold fixtures, that is an over improvement and the owner will have to live in the house long enough to get their money’s worth from the enjoyment of having gold fixtures and not from a higher appraisal however over improvements may add to the marketability of the property. The only thing a homeowner can do to insure they get the highest appraisal possible is to maintain the property as close to new as possible. Appraisers see through lame attempts to sway the value. The appraiser has the only and final say in the value. If an appraiser has knowledge that another appraiser has already appraised the property, they can lose their license if they take the assignment. Everyone in the deal has a money motive except the appraiser who only receives a fee and can never receive that fee based on value.
Certified Residential Appraiser
Owner of Morgan Appraisal Service