What to do if the appraisal is low?

By Jim Williams

Realtors, Buyers, and Sellers often ask me this question. From an appraiser’s perspective, my first response is, what makes you believe it is low? Maybe the appraised amount is accurate. Why would you pay an expert to spend many hours researching and verifying information and then not believe their opinion? But, let’s assume that for whatever reasons the appraised value is just plain low. Your reaction depends on which side of the transaction you are on.

The Buyer

Rejoice! You have an opportunity to re-negotiate the transaction! If it happened to me, I wouldn’t even question the appraisal. It is more than likely the best appraisal you will ever pay for. Unless the appraisal report has errors or is incompetently prepared, I would never pay more for the property than the appraised amount. After all, your lender won’t make a loan based on an amount in excess of the appraised value.

The Seller

You have a major problem, because more than likely all you will be able to discover is the appraised value. In almost all cases the appraisal report belongs to the party that requested it-this means the buyer or lender. But, if you have a cooperative buyer, perhaps you will be able to examine the appraisal report for factual errors. Appraisers do make mistakes from time to time. I once reviewed a disputed appraisal and discovered that the appraiser had failed to notice a basement! But, this is very unlikely. The best you can probably hope for is to request another appraisal at your expense. But, usually your best recourse is to find another buyer.

The Realtor

If you are representing only one party to the transaction (buyer agent, selling or listing agent) then your choices are limited to those described above. However, assuming you are the “middle person” that is attempting to act in the best interests of both parties, the problem is somewhat compounded. The difference between the proposed sales price and the appraised value could lie in a fundamental difference in our professions, the varying definitions of market value.

The Realtor is obligated to obtain the “highest price” for the seller. The appraiser is obligated to arrive at the “most probable price or value”, you may have found the one buyer for that property that is willing to pay that particular price. But we appraisers must consider a certain amount of “depth” in our market value estimate. This means we must consider that at least one more buyer for that property exists. The best way to do this is by “bracketing” our comparables. This means we find a recent sale of a better home and adjust downwards and an inferior home to adjust upwards, and hopefully one or more highly similar homes that have recently sold in the same approximate price range.

Where we usually run in to problems is when there are sales concessions added to the sales price, or in new subdivisions with staged price increases. But, let’s assume that the property had adequate exposure and seems appropriately priced based on similar properties, and the lender’s appraiser produces a low appraisal. What to do? The tried and true method is to start faxing “comparables” to the appraiser. This is usually not successful unless you have comparables that were not readily available to the appraiser, such as “pocket listings” that were unpublished.

The first thing I would do is ask for a thorough review by a reputable review appraiser. All lenders have an appraiser or even several appraisers they use for reviews. The review appraiser usually is more experienced and holds a higher level of certification. Several of the lenders I work for will accept a value revision of 5% based on a “drive-by” of the subject property and comparables.

If the lender is not responsive to your request for a review, change lenders. If it’s an FHA purchase, you will more than likely have to change to a conventional loan program to get a different appraisal.

If after a review appraisal, or lender change with a second appraisal, the appraised value is still “low”, there must be a conflict with our two definitions of market value. The situation will probably not be resolved and the transaction will not continue unless the seller is willing to accept lessor the buyer is willing to pay more-than a lender is willing to loan.