How to reverse a low appraisal

Appraisals often inspire as much fear as they do confusion.

With today’s unpredictable market, an increasing amount of real estate transactions are now falling apart (or at least are prolonged) by low appraisals. It’s a special kind of stress when you make it through the inspection, and are a week away from closing, when the appraisal report comes in with a value that is thousands of dollars lower than the contract price. As if there wasn’t enough to stress about!

As an FHA Appraiser and a Realtor® myself, home owners and fellow agents often ask me how they can deal with tough appraisal situations. Thankfully, there is a process! In my capacity as a real estate agent, I have reversed three low appraisals this year alone. But before I outline some helpful strategies, let’s review some basics. What is an appraisal, and why do we even have them?

According to the Uniform Standards of Professional Appraisal Practice (USPAP), an appraisal is simply “the act or process of developing an opinion of value.” Note the word opinion. If a house sells for $400,000, that sales price is an objective fact. But if a buyer got what some would consider a great deal on that purchase because the value was probably $410,000, that is an opinion. However well-informed it was by the data. Price is a fact, and value is an opinion, in other words.

The job of an appraiser in a purchase transaction is therefore not to determine the value of a house. The buyer and seller already know what that is when they agreed on a price! The purpose of an appraisal in a mortgage-related transaction is really twofold:

1. Protect consumers, and
2. Protect investors and the market as a whole.

1. Consumer protection:

When appraising a property, an appraiser is required to independently verify factors that influence value, such as measuring the square feet to verify the size; and reporting on factors such as room count, remodeling, depreciation, and other things like waterfront, views, and many other attributes. If you’re buying a home, don’t you want to know that the reported square footage on your new home is accurate, or that the previous owner didn’t misrepresent anything?

Especially with government-supported loan products like FHA or VA home loans, appraisers also have heightened requirements to report on any threats to the safety of the dwelling, such as mold, vermin infestation, or the absence of smoke detectors for example.

2. Protecting the market:

Your home loan is a commodity. When you move into your new home, your lender usually sells the mortgage for your house on what’s called the secondary mortgage market. This is a place where mortgages are bundled together into bonds, and investors purchase these bonds for a return. The existence of this market is what allows mortgage interest rates to be relatively consistent across the country, and serves to make home ownership more accessible to millions of Americans.

For investors to feel secure purchasing these bonds (and thereby sustaining this system), the mortgages all have to meet certain appraisal standards. These are set by federal entities like Fannie Mae. More importantly, lenders and bond investors want to know that the value of your house is worth more than the amount of the loan. That way, if you were to ever default on your mortgage, the investors don’t have to worry about getting their money back. An appraisal report is basically a stamp of approval on these people’s investments.

Before the 2008 crash, appraisal and lending standards were a lot more lax than they are today. As a result, many people borrowed way more than they could afford, and homes became significantly over-valued. This destabilized the economy when the market eventually corrected itself, and millions of people lost their livelihoods. By reporting the honest value of a property, an appraiser plays an important role in ensuring that that sort of instability never happens again.

Appraisers, of course, are human. And humans often make mistakes. So how do you protect yourself from a low appraisal if it is not an accurate reflection of the value of your property?

Here are some common sense strategies I have found that work very well:

1. Anticipate appraisal risks from the onset.

It’s way easier to avoid a problem than to fix one. If you’re selling your home, your listing agent should have a firm grasp on property values in the neighborhood. Your agent should have familiarity with lenders in your area, so you can know in advance if the buyer’s loan will close easily or if their lender may have a problematic appraisal team. Your agent should have a clear, consistent process for engaging with the appraiser and making the process as easy as possible for them. They should have comps to support the contract price. They should send all offers made on your house to the appraiser if you received more than one. And if your contract price is perhaps a new price point for the area? Have your agent negotiate to have the buyer agree in advance to put more cash down if your home appraises low.

If it appraises low:

2. Treat the appraiser non-adversarially.

Sometimes appraisers just make honest mistakes. In the last low appraisal I reversed, the appraiser simply missed a page in the contract: the part that said the home got multiple offers and escalated to $12,000 more than the list price! Rather than chewing the guy out, I calmly explained what had happened in a face-saving way, before sending him helpful data to support the price. Allowing people to keep their dignity makes them more likely to want to help you out. If you treat the low appraisal like a misunderstanding that you can work on together vs. calling their work stupid, that could be the difference between having a cooperative partner instead of a recalcitrant opponent.

3. Do as much of their work for them as you can.

Appraisers are over-worked and in many cases under-paid. Sometimes things slip through the cracks. Was there a recent, nearby home sale that really justifies the sales price? Send them that data; take a photo of that house from the street and send it to them, so they can have an accurate idea of its market appeal. Did they neglect the fact that you made serious updates to your house? Send them contractor invoices and a list of improvements. Did they get the square footage wrong? Send them measurements you had professionally taken, or builder plans or an Assessor sketch. Nothing will endear you more to your appraiser than saving them needless time, labor, and gas money.

4. If playing nice doesn’t work, look for mistakes and document them for the lender.

Unfortunately, sometimes people are both careless and stubborn. If your appraiser has made an erroneous value conclusion, and they are unwilling to work with you on fixing it, your target audience shifts from the appraiser to the loan underwriter. A mortgage underwriter is the official who makes sure all the lender’s appraisals meet federal standards so their loans can be sold on the secondary mortgage market, as described above. Naturally, they are always on the lookout for errors or omissions.

Appraisal errors go beyond ignoring more suitable home sales in the area. I remember one appraiser who ignored an entire floor of living space! Did they take into account supply and demand in your market, and other market conditions? If you received multiple offers, did they take those into account? Did they accurately analyze your property? Serious errors that call into question the credibility of the value conclusion can be cause for the lender ordering the appraiser to make a revision – or in extreme cases, assigning a new appraiser to make another attempt.

In most cases, appraisal issues are entirely avoidable with sufficient preparation and expertise on your side.

Sellers: If you’re ever curious about what a certified residential appraiser thinks your home’s value might go for and appraisal-related pitfalls to avoid, feel free to reach out anytime.

Buyers: If you’re looking for an expert local lender with a predictable and professional appraisal team, click here for a list of lenders I have successfully closed many transactions with.

Anders Ibsen

Author

About the author