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A low home appraisal can wreck your home purchase. And it can ruin your chances of successfully refinancing your home. It may mean less cash out, higher costs, or no deal at all. But you do have options.
- Appeal the appraiser with your lender / appraiser
- Ask (and pay for) a second appraisal
- Change lenders and start over with a new appraisal
- Renegotiate the purchase price with the seller
- Make a higher down payment
Understand that any options involving a new appraisal are going to cost you, so be very sure that you have a legitimate problem before undertaking this.
Why do you need an appraisal?
A mortgage is a loan backed by real estate. If you fail to repay the loan as agreed, the lender can foreclose, repossess and sell the property to recoup its losses. So naturally, your mortgage lender wants to make sure the property value is high enough to support the amount you want to borrow.
Ultimately, the value of your home, along with your credit rating, determines which mortgage programs you qualify for, and how much you’ll pay. The relationship between the property value and your loan amount is called the loan-to-value, or LTV. The lower your LTV, the more desirable your application is to a lender.
Lenders rely on licensed home appraisers to determine a home’s “official” value. Appraisers are trained professionals who certify the value of homes for lenders, generating standard reports called appraisals. If you’re purchasing a home, the appraisal protects you from overpaying for a property.
When an appraisal falls short
Sometimes, an appraiser finds the value of a property to be less than what’s need to make your purchase or refinance work.
With a home purchase, this may mean that the home appraises for less than the home’s contracted purchase price. On a refinance loan, it may mean that the home appears to have insufficient equity to meet mortgage standards.
When your appraisal falls short of the desired or expected value, buyers and refinancing homeowners have options.
This article explains how appraisers value your property, where you may find errors that can be challenged, and what to do when you’re certain the appraiser has made a mistake (which can happen!).
How do appraisers determine your home value?
Appraisers are professionals and trained and licensed. It’s their job to provide objective valuations of real property.
In order to assign a value to a given home, appraisers use a combination of public and private information. Including information from the homeowner.
Your appraiser considers these and other factors when valuing your property:
- The sales prices of similar, recently-sold properties in the same area
- The average time-on-the-market in the area
- Local sales price trends
- The balance of buyers and sellers
- Your home’s overall condition and grade of construction
- Number of bedrooms and bathrooms compared to the neighborhood norm
- Amenities like fireplaces, decks, landscaping, bonus rooms, and garages
- Home improvements made since the date of purchase
- The lot size compared to other homes in the neighborhood
- Neighborhood zoning restrictions
- A home’s uniqueness (unique is not always a good thing)
A completed appraisal report covers a lot of material and can run 20 pages or longer. Not only does this create the opportunity for errors, it also allows the appraiser to be subjective about some of your home’s features. He or she may hate wood siding, or your wall color, and that could subtly affect the final value.
As a home buyer or refinancing household, it’s often smart to review an appraiser’s finished product to look for errors, omissions, and inconsistencies. There’s a process by which you can have your appraisal “fixed”.
You can appeal a low appraisal
Despite using standard procedures and formulas to find a home’s value, an appraisal is still somewhat subjective; the appraiser’s opinion plays big role.
There are four ways in which an appraiser’s opinion can affect your home valuation. Each is grounds for an appeal, if you’re able to support your argument.
If your loan is a VA loan, you can submit a VA [post-link post=“11984” linktext="“reconsideration of value”"] request. For everyone else, the advice below should be of help.
When the appraiser uses outdated “comps”
The largest influence on your home’s appraised value is the recent sale prices of other homes which are similar to yours. These similar homes are often called “comps”, which is short for “comparable properties.”
A comparable home might be across the street, having the same number of bedrooms and bathrooms as your home. It would also offer a similar number of rooms and square footage. And it must have sold recently — within six months at most. Adjusting for improvements and condition, the value of this home and yours should be very similar.
A non-comparable property might be one in another part of town, a local sale from a year ago, a nearby property with double the square footage, or a foreclosure sale down the street that the formers owners trashed before leaving.
An appraiser will search home sales records to find the sold price of comparable homes to yours. If that search is incomplete, or doesn’t include all recent data, the appraiser may reach a false conclusion on the value of your home.
This happens frequently, in fact, because local governments don’t immediately record home sales to public record. If you’re aware of a recent sale that your appraiser neglected to include, notify your lender.
You can challenge an appraisal that uses outdated records or non-comparable properties, and ask for a higher valuation. An experienced real estate agent can help you find more recent or appropriate comparable sales.
When the appraiser omits home improvements
Appraisers work hard and try to be as prepared as possible before arriving on-site for an inspection. Part of this preparation includes researching your home among public records.
The data from public record includes your home’s most recent sale price, the number of bedrooms and bathrooms, and a few other data points to generate a value range. You can even access this information yourself, online. It’s called an automated valuation model or AVM. There are many sites that help you estimate your home’s worth.
Some lenders have their own AVM systems they use to come up with your home value. Obviously, this is a very rough estimate and won’t account for home upgrades and improvements you have done since the last refinance or purchase. If your lender only uses an AVM and comes up with a low value, push for a real appraisal.
Using an AVM can save an appraiser time, but if the public record is incomplete, or if the appraiser isn’t paying close attention, he or she may omit key improvements that you’ve made.
When the appraiser doesn’t know the local area
Reforms enacted a few years ago prevent your lender from choosing an appraiser for your home. This is supposed to ensure impartiality. But it also allows less-than-great appraisers to jump into an appraisal management system and claim jobs as they appear. Whether they are qualified or not.
Sometimes, appraisers drive 100 miles or more to complete a home appraisal. When your appraiser is unfamiliar with your neighborhood, the subjective nature of an appraisal takes a backseat to data from public record.
This means that homes in up-and-coming neighborhoods may not get the value they deserve. And amenities that get high value in certain area may be overlooked. For instance, locals may put a premium on in-ground hot tubs or fireplaces that those in other neighborhoods may not care about.
If you feel that your appraiser doesn’t understand your neighborhood, this can be grounds for an appeal. Be sure to notify your lender as soon as you’re aware of the issue.
When the lender makes a mistake
Appraisers are human and humans make mistakes. Therefore, it’s a good idea to review your home appraisal and check for errors.
Some common errors include incorrect square footage and lot size measurements; mis-stating the number of bedrooms and bathrooms, and omitting features such as fireplaces, patios and assigned parking spaces.
You have grounds for an appeal when your appraiser makes an error. Be prepared to show evidence of the mistake.
How to avoid a low appraisal
Appraisals are to some extent subjective. And you are vulnerable if your appraiser has no local knowledge. You can refuse to allow an appraiser to do perform the work if you feel that he or she is unqualified.
When you get a request to open up your house for an appraiser, check this person out. Ask for the physical address of his or her office. If it isn’t local, tell the lender that you want a new appraiser. You are allowed to do this.
You can also look up appraisers on sites like Yelp and get records of any complaints filed against them by checking with your state real estate division. If this person rings alarm bells, tell the lender to send someone else.
Once you have an appointment with the appraiser, make sure the property is clean, attractive, and uncluttered as possible. Provide easy access to all rooms, the garage, and especially any special features that you want noted. If you have completed improvements, a list of them them their costs (with receipts if you have them) is very helpful.
And if you know of a home that just sold that would reflect well on your own home’s value, provide the address. Note that list prices mean nothing; sales prices are what counts.
Reviewing your appraisal
You are entitled to a copy of your appraisal. Get one and review it for accuracy — room count, square footage, features, grade of materials — make sure than everything that adds value has been noted and included.
Check the comps. If you know that a low comp was the result of a foreclosure, short sale or otherwise distressed transaction, get your proof and prepare to fight its inclusion.
If you can, it might be worth springing for a broker’s price opinion (BPO), which is a “mini-appraisal” conducted by a real estate broker licensed to perform it. They cost less than full appraisals and could bolster your point.
When your appraiser won’t make a correction
There are times when you’ll request an update to your appraisal, and you won’t get it. If you’re sure the appraiser made an error, there is a way forward.
Remember: appraisals are part of the home approval process, the appraisal belongs to the lender, and the lender is not allowed to commission a second appraisal just because the first one was low.
However, lenders have appraisal review committees, which can go over an appraisal that you don’t feel was accurate. For some programs, lenders do order more than one appraisal, especially for higher-end properties.
Unfortunately, few appraisal review committees increase values; they more often adjust them downward.
Dump your lender and try again
As the mortgage borrower, though, you still have control.
When your appraiser won’t fix your appraisal and your lender won’t help you out, consider taking your business to another mortgage lender and re-applying for a loan.
Before doing so, verify with a knowledgeable industry pro that the first appraisal was flawed. Check your home value with a few online AVMs and maybe get a BPO. You don’t want to pay for a second appraisal that is also low.
Consider filing a complaint if it’s obvious that the appraiser did poor work. He or she may be dropped from the lender’s list of approved providers.
Restarting your loan may delay your closing, but without a good appraisal, you won’t likely close at all.