How to Challenge That Low Appraisal

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 (HVCC) went into 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.

"Everyone needs to understand that real estate appraisers report the market, we don't make the market," says Sara Stephens, 2012 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 impact 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 themselves may be different.

Carole Short, a sales associate with Coldwell Banker Residential Brokerage in Dunwoody, Ga., says, "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."

While homebuyers and homeowners cannot control a property appraisal, there are steps they can take to influence and challenge it if need be.

Educate the appraiser

Amy Tierce, regional vice president for Fairway Independent Mortgage in Boston, Mass., says, "I recommend that Realtors 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."

Lenders and appraisers are catching up with green homes

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. Realtors can present the appraiser with information on comparable sales and how they came up with their sales price.

How to challenge a low appraisal

An appraisal dictates how much money lenders are willing to lend to a given 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 sales 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," says Short. "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 the seller is 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," says Short. 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 sales 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 in a purchase, can request a copy of the appraisal and review it. Short says Realtors and buyers would need to provide additional facts about comps or point out mistakes regarding such items as the amount 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," says Stephens. "You can also hire another appraiser to do a review of the appraisal for an additional cost."
  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," says Stephens. "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."

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