When Appraisals Come in Low
PUBLISHED SEPTEMBER 12, 2013
By LISA PREVOST
One consequence of the subprime mortgage crisis is a far more rigid home appraisal process. Borrowers can complain about lower than expected appraisals — which may mean they can’t borrow enough to meet an agreed-upon sale price, or can’t refinance — but lenders very rarely reconsider.
Federally enacted rules have set up regulatory walls between loan originators and appraisers so as to shield them from pressures to inflate home values. Now many banks order appraisals through a third party, typically an appraisal management company, which acts as an intermediary.
“In the past, you could communicate that you were unhappy with the appraisal,” said Patrick Galway, an appraiser and the manager of the Town & Country Real Estate Westhampton office. “Today, that kind of communication is severed.”
One option is available to borrowers: a rebuttal letter to the lender. If such a challenge is to garner any attention at all, it must lay out solid and objective evidence of where the appraiser went wrong. But without a decent knowledge of appraisal guidelines, that can be difficult to do.
“The most important thing to keep in mind is a challenge has to be based on facts,” said Robert Morin, the president of the Greystone Valuation Group, in Bedford, N.Y.
Appraisers determine a property’s value partly by researching the sales prices of nearby homes. These homes should be of similar size and style, and located roughly within one mile. The sales should have closed within the previous six months.
Borrowers who question an appraisal should obtain the appraiser’s report from their lender and review the comparable sales that were used. “If they believe they’re not good representations of the property,” Mr. Morin said, “then they should hook up with a local Realtor to get assistance with getting better sales.”
That might mean sales that were pending at the time of the appraisal, but have since closed. If they support a higher value, they might make a difference.
The borrower should also consider a host of factors to see if the “comps” are truly comparable, said Collin Lord, the owner of Absolute Value Management in Boston. Are they located on busier roads? Are the kitchens and baths more dated than those in the purchase property? (Variables like decks and fireplaces are unimportant.) And most important, are the living areas of similar size — that is, not more than 25 percent larger or smaller?
In putting together the information for the lender, borrowers should always “maintain a level of professionalism, and not be accusatory or derogatory,” Mr. Lord said. “It’s important to be respectful of the procedure.”
In all likelihood, however, rebutting an appraisal will prove fruitless. Better to be prepared at the beginning of the process with a list of recent sales that are most comparable to the property to be appraised, Mr. Galway said. “I think you have your best shot and maybe your only shot before the appraiser shows up at the house,” he said.
In a market like this one where prices are rising, sales that are six months old may not reflect current values, said Heather Harrison, an owner of Platinum Drive Realty in Scarsdale, N.Y. That can be frustrating for buyers, but convincing banks that values have risen can be tough when they’re looking backward. Recently, she sold a condo listed for $1.1 million to a buyer who, after some initial hesitation, decided to use cash to make up the difference between the negotiated price (close to list) and the bank’s appraisal of $920,000.
Another possibility is to try another bank. Sometimes, Ms. Harrison said, a second appraisal does the trick. ■