I received an email from a client this week. It was a forward of a conversation he was having with his lender for the purchase of a home. The appraisal had come in low and this lender for some reason didn't speak to me about it first. Instead, he lets the buyer know and gives the buyer one option.... pay the $15,000 difference in cash. The buyer was asking for help. Some lenders, more typically ones that are not local, forget that this is a stressful process for consumers. Why would an appraisal be low? Is he overpaying for the house? What if the seller won't come down on the price?
1. Appraisals are not an exact science
Appraisers go through extensive training to do what they do. It takes more to become an appraiser than it does to get a real estate license. But, just like in any field, all players are not created equal from a skill set standpoint. Real estate agent, doctor, lawyer, teacher, coach, police officer, chef, and appraisers have one thing in common. There are some in the industry that are really good, some that are really bad, and the majority in between. There is one appraiser that had done appraisals on 3 different transactions I was involved in. Two of them I represented the seller and one the buyer. In each case, he cut the purchase price by at least 20%! Two of the houses were larger sales prices and the values cut were 40k and 50k!! One of those sales, the seller didn't want to go through the process again and split the amount in half with the buyer. On the other 2 sales, another appraisal was done within weeks of this bad appraisal and both times the new appraisers (who knew nothing of the former issue) appraised the homes at asking price. The ones who are very good in my view are the ones that call me as the listing agent to let me know when they are questioning how I came to the value cause they aren't seeing it. I also have a lot of respect for the ones that ask me about past sales of mine that they are using as a comp, because it shows that they really do their due diligence.
2. You can dispute the value
This is an uphill battle to be sure. But, still worth a shot. The reason it's a challenge is that the ultimate decision lies with the appraiser who cut the value to begin with. They'd have to concede that they were off target. My method is as follows: I analyze the comps in the report to see if any are weak, then describe in writing why they should not be considered. Then I find as many comps as I can that are better than the weak ones and give a brief explanation.
3. Switch lenders
If the dispute fails, then you can switch lenders. A new appraisal will be ordered and you will need to be fairly confident that the first apprasail was truly off target. This will also inevitably mean a delay in settlement by 2-3 weeks on average.
4. Be sure it was a bad appraisal
Just because it was low, doesn't mean it's wrong. I've experienced a couple hits in my time that I looked at the report and I didn't like the hit, but couldn't make a good argument against it. It's important to note that these hits were within 5k of sale price. I say that because the likelihood of a buyer who is house shopping to pick a home that is worth much less than the other homes they are viewing is very low. That is more common if a buyer jumps on the first house they see and haven't become acquainted with the market. Just think of a 50k hit on a 320k house!! The buyers are shopping over 300k and they fall in love with a house that is only worth 270k, but just overpriced that much? It defies common sense. In a growing market like we are in now, it is the small cuts that will be more common because as values are growing in real time, the appraiser has to look as far back as a year in the past to assess the value of a home today.
5. Split it up
If buyer and seller want to be reasonable and just get it done, they could split the difference. The buyer was ok with the original price and felt the home was worth that number, so they are getting a better deal. The seller is the one that looses. So for a buyer to demand the seller to take the full hit is not reasonable. However, the value is in dispute, so the seller expecting the buyer to just fork out the cash is not reasonable either. Important to note hear that this is in a scenario where the value is truly in dispute. When I am confident that the appraisal was just bad, then I would not recommend that a seller take any hit on it.