As a real estate broker or mortgage broker, whose commissions often depend on the results of an appraisal, what should you do when that package arrives, and the appraisal is lower than needed to make the transaction work?
As the market continues to change, and many property owners in the market are still out of step, so I suspect that the idea of low appraisals will rise in occurance. Initially the inference of a low appraisal is the idea that the appraiser is simply wrong or incompetant. After all, everyone else already knows the number [Matrix].
But lets assume the appraisal is actually supportable, accurate and, well, right.
What should you do? This question is answered in a new Washington Post column called House Counsel by Benny L. Kass that addresses real estate issues from a legal perspective. In Low Appraisal? How to Keep a Home Loan and Sale From Collapsing [WaPo], the author says the appraiser works for the lender:
Whether the real estate market is hot or cool, home buyers and sellers can get upset when the appraiser who is examining a home on behalf of the mortgage lender sets a value below the agreed-upon sales price.
Even though the borrower pays the appraisal fee, the appraiser is really working on behalf of the lender — to determine how much a home is worth so that the bank doesn’t lend more than it should.
Here’s what I suggest (as an appraiser) and then I’ll add the article suggestions:
DO NOT call up and yell at the appraiser or get personal in any way. Do not relay this tone with the lender or any other parties in the sale.
Try to get and review a copy of the appraisal report if the borrower has it.
Provide objective comments about data that was overlooked and provide new info that can be verified and logic why it is better than what was originally presented.
Provide feedback about whether the appraiser familiar with the local market. In other words, do they cover it on a regular basis or have you ever heard of them (be careful what you say).
Assuming this goes nowhere or the appraiser (gasp) is actually right:
Buyers should talk to the seller. Even if real estate agents are involved, the author suggests that they should try to communicate directly with the seller and not go through the intermediaries. Explain that the appraisal came in very low and that they cannot afford to put up the cash difference. While they are obviously reluctant to lose their $10,000 deposit, that may be the only alternative.
Negotiate a lower price. The author’s definition of a dispute settlement is one in which both parties may walk away unhappy but nevertheless walk away. Perhaps the buyer can agree with the seller to split the difference between the contract price and the appraised value.
If the appraiser is unwilling to cooperate, ask the lender whether it is possible to get a second opinion from another appraiser. [This is often the case because real estate and mortgage brokers often get personal with their criticism of the appraiser]. The problem here is that the second appraisal is tainted since it was ordered by an interested part and will not be given the same weight, or any consideration by the lender, especially if the first appraisal appears to be fine.
In reality, the buyer should have no one but themselves to blame. As a buyer, they should insist on including the financing and appraisal contingencies in the sales contract in the current market. As far as the author is concerned, not doing so could be considered a form of contributory negligence. [yet it has been standard practice during the boom]. The broker is not at fault here.
If the appraisal is low, then there is a low chance that the deal will fly. So what’s the long term solution?
- First of all, appraisers need to manage their clients expectations and forewarn the client that there is a problem with the value and provide reasons why so the client can scramble.
Brokers (listing and buyer’s broker) should meet the appraiser during the inspection and be helpful providing relevant information such as data that can be verified (DON’T be a distraction on site though: I will scream the next time I am told “Here is the kitchen”).
Tell the appraiser about relevant contracts, listings, summarize the activity on the sale. If you provide information, make sure it can be verified and its not a bad idea to provide a little narrative as to why the property is worth what it sold.
I don’t want to hear that the property is fabulous.
Absolutely on the mark article, all brokers should read this. It’s specially a dance when dealing with appraisers whose field is outside Manhattan. I treat them with absolute respect and come loaded with appropriate data, because i’ve seen them get all in a twist just over the price which is always so out of whack with what they generally deal with.
This is a well written and good article on appraisals……. I really enjoyed the remark “this is the kitchen”
I’m glad to read this from the appraiser’s point of view. It’s always a tense situation, though in Mortgage Broker’s defense there is terrible pressure on them to get the deal done from all the other parties, and since they ordered the appraisal, choosing the appraiser, the Mortgage Broker shares the blame for the appraisal coming in low. That might account for some of the “getting too personal” in their comments.
With limited experience with appraisers, here is my comment: They rely too much on what houses are selling for and not the quality of the house or neighborhood. The REASON a house recently sold for a low price should be taken into consideration if the construction value and neighborhood take the “back seat” in the appraisal. If a seller HAS to sell for various reasons, this causes the other real estate agents to drive the market down with “that’s what the houses are selling for” comments, in hopes of getting the “quick sale” and high profits. The “drive down” is then picked up by the appraiser and the spiral down (or up) begins until the “problem houses” are off the market.
The appraiser need do nothing. He/she did their job (presumably) according to USPAP.
The appraiser’s next step should be to take the phone off the hook and begin looking for a new career, for surely this one is dead.
i just had a horrible apprasiel it came in 25k less then what we though only a 150k house. he measured wrong, took 12 days to finally get it we close in 12 more days. he didnt take into affect that the house is totally redone, and he used comps from 6-12 months ago when in our area prices are up 32% this year. if it doesnt clear up im sueing him as he is incompetient of doing his job. and everyone agrees 5 realators, loan officer nobody understands where he got his numbers. listing as a 1 car when it is a 2 car. 600sq ft basement when it is almost 800 is off on sq ft on all leavels by over 100 sq ft.