Appraisers might be more notorious for breaking hearts than your high school crush.
After popping the champagne to celebrate getting an offer on your home, the all-important home appraisal (dun, dun, dun) is next—and you want it to go well.
(Video Credit: Corinne Rivera / HomeLight)
Any potential home buyer seeking a mortgage needs an appraisal to close the deal. Before financing a mortgage, a bank wants to make sure that the size of the loan isn’t more than the house’s fair market value. So the lender hires an appraiser—typically from an appraisal management company—to provide what should be an unbiased assessment of your house.
If that appraisal is less than your offer, that evaluation feels anything but fair. But it’s not unusual.
The National Association of Realtors reports in its April 2018 Realtors Confidence Index survey that 18% of contracts with delayed settlements encountered appraisal issues. What’s more, of the 75% of contracts with settlement contingencies, 41% of those involved appraisal issues.
We’re here to walk you through just what exactly an appraisal involves, the reasons why an appraisal might come in low, how to avoid a bad appraisal, and what to do next if an appraiser leaves you crushed over a number you weren’t expecting.
What Does a Home Appraiser Look At?
An appraiser records the layout of your property and assesses its condition. Appraisers must be qualified and certified in your state and, in most states, adhere to the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice. Depending on your property’s condition and size, an appraisal can be a quick 15-minute visit or a two- to three-hour examination.
Appraisers look for a variety of details, according to the Uniform Residential Appraisal Report form:
- Your property’s dimensions and the year your home was built
- Neighborhood characteristics, including zoning classification
- Construction details: type of foundation, if you have a basement or attic, type of driveway, car storage, materials of the interior walls and floors
- Utilities and amenities: whether you have public utilities or other off-site improvements (and whether these are typical for the market area), whether you have a fireplace or patio, features such as energy efficient appliances, types of plumbing and lighting fixtures
- General condition and any needed repairs
Afterward, the appraiser searches for similar sales in the area within the prior 12 months to create an opinion of your home’s fair market value.
The appraiser drafts a report (usually 10 pages or less for a residential property) for the lender, which on average takes less than a week to complete. FHA and VA loan appraisals might take a bit longer because these lenders require more detailed appraisal reports.
Here’s Why Home Appraisals Come In Low
All these variables leave plenty of room for an appraisal to come in low.
For instance, if the market moves faster than normal, comparative sales, or comps, often don’t keep pace with present prices. That also goes for a sluggish market, where a lack of quality comps make it tricky to nail down the property’s market value.
“Usually, the market moves before the appraisers do,” says New York City real estate agent Dylan Hoffman, who ranks in the top 100 brokers nationwide. “It’s the brokers that set the market, not the banks. We’re always pushing the market up, up, higher, higher. We have to become educators to the banks to let them know what the market’s doing.”
Your appraisal might also suffer from bad or missed comps. Perhaps a neighboring property was rundown when it was sold but the new owners have rehabilitated it—or public records haven’t yet recorded a recent sale of a property similar to yours. Foreclosures, bank-owned properties, private sales to relatives, and distressed properties in your area also can skew the comps.
In terms of pricing, if homes in your area tend to sell for, say, about $500,000—where you’ve set your asking price—and one of the comps that an appraiser has selected sold for $380,000, the whole average drops to $450,000.
Think of an appraisal as the appraiser’s “price opinion,” Hoffman says. “It’s up to the appraiser’s discretion to follow up and figure out why there’s an outlier.” That might mean researching a previous sale through public records or the broker who sold the property.
“Every once in a while I’ll get a situation where an appraiser will call me and say, ‘Hey, I’m running comps in this neighborhood or in this building, and I see you sold one before that was for less than the average—or more than the average. Can you tell me why?’” Hoffman says. “But I have to say, 90 percent of them don’t do that.”
Some appraisers might be new to the profession and lack local market knowledge. According to the National Association of Realtors March 2017 Appraiser Trends Study, less than 1 in 5 respondents train newcomers to the field. The study notes that regulation, compensation, and liability are some factors inhibiting training.
Appraisers also have a high workload, the study says. Nearly 35% of respondents performed more than 300 appraisals in the prior 12-month period, an increase over the previous 12 months.
What’s more, an appraisal might not be thorough. In New York City, an appraiser makes an appointment with a listing broker to see the property, but in other parts of the country, an appraiser might just drive by and look over the outside. “Some appraisers don’t even get out of the car,” Hoffman says.
Homeowners tired of having their home on the market also might have put aside minor household repairs and slacked off on cleaning up. Those little things too can cast your home in a bad light.
“Appraisers are subjective,” Hoffman says. “If they’re not wowed by the property and sold on the property while they’re there, that can be an issue.”
How to Get the Best Appraisal You Can
To start your appraisal off right, collect any important documents for the appraiser, such as a land survey that verifies your property’s size and receipts for any recent improvements.
Have your real estate agent there to talk about any unusual circumstances for low or high sales in your area, and to provide their own comps. Hoffman says he prepares an entire appraisal package, including recent comps and the property’s floor plan.
Then clean up inside and out. Touch up any chipped paint, replace that wonky hinge on the kitchen cabinet, corral any pets, and clear away the clutter. Trim your hedges, mow the lawn, and clean the gutters. You want the appraiser to see your home is well maintained.
“Treat it just like you would if it was a buyer,” Hoffman says. “Clean. Take out the dirty dishes. Wash the windows. …. It is a showing. You have to sell the appraiser.”
You also can pay for an appraisal before putting your home up for sale, then set your asking price to match. This gives you an advantage because your home will seem reasonably priced from the outset. Angie’s List notes that the average cost of appraisal for a single-family home ranges between $300 and $400. An appraisal on a multifamily building starts at about $600.
What To Do If Your Appraisal Comes in Low
If your appraisal does come in low, don’t get emotional. There are ways to turn this situation around.
1. First, look for errors in the home appraisal.
The appraisal report should come back in less than a week.
As the seller, you won’t automatically get a copy of the report, but you can request one and the lender will have to provide it to you in 30 days time.
As you examine the report, double check the basic data (square footage, number of bedrooms and bathrooms) and how the appraiser described your home’s features.
Perhaps the appraiser didn’t note that you have energy efficient appliances and lighting. (It’s like telling your car insurance company about your vehicle’s safety features so you get the best rate possible).
“If there really is an error, 99% of appraisers will want to fix it, even if it doesn’t change the valuation of the property,” said M. Lance Coyle, a Dallas-based appraiser and a past president of the Appraisal Institute, in an article by Freddie Mac.
2. Challenge the home appraisal with a Reconsideration of Value.
If you and your real estate agent have done your homework and feel confident that the home appraisal was erroneous, you can challenge the appraisal with appeal procedures called “Reconsiderations of Value,” according to the Appraisal Institute.
The book Appraising the Appraisal: The Art of Appraisal Review outlines the most common grounds for an appeal, which include:
-Poor analysis of comparable properties (say if two of the comps used were sold five years apart instead of including more recent sales).
-Disregard of special financing or concessions
-Miscalculation of gross living area
You also want to look at whether the appraiser performed an adequate inspection.
In addition to the appeal route, you can file a formal complaint with your state appraisal board or the appropriate professional appraisal organization, if you believe the appraiser who evaluated your home wasn’t qualified.
3. Request a new home appraisal.
If you were able to show that the first appraisal was problematic or inaccurate, the buyer can request a new appraisal from their lender from a more qualified appraiser. Ultimately this is up to the buyer since they will be footing the bill.
“It’s very hard,” Hoffman says. In some cases, “The deal can die.”
4. Negotiate with the buyer to save the deal.
As the homeowner, it’s your decision whether to hold firm on the asking price or drop to the appraised value. But there are ways to find common ground.
Hoffman says he’s glad to negotiate with the buyer’s agent. “I always encourage them to call me: Let’s talk it out.”
For instance, a buyer can make a larger down payment to cover the difference between the appraised value and the asking price, or pay private mortgage insurance.
You also can make up some of the difference by covering the buyer’s closing costs.
Appraisal Came In Low? Hang in There
Without a doubt, a low appraisal adds stress to the process of selling your home—but at this point, you really are near the finish line.
If you prepare yourself ahead of time, and work with a top local real estate agent to help get you over any final bumps in the road, you’ll know how to handle whatever the appraisal process brings—and hopefully at or above the price you want.
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