When you’re buying a home, your home appraiser holds a surprising amount of power. If the house appraisal comes in less than the agreed-on price, you could be left to make up the difference out of pocket, since lenders approve loans based on the appraised value, not the contract price. It’s possible the sellers will drop the price of that Boston, MA, real estate to match the appraisal. After all, if the home appraised low once, it could very well appraise low again. But if the sellers won’t budge — maybe they have an all-cash backup offer in the wings — it could mean back to the drawing board for you. Be prepared; here’s what you need to know about all the ins and outs of the appraisal process.
1. Understand what you can’t do
Control freaks take note: Buyers can’t do much to affect an appraisal. “The appraisal process is completely hands off as far as the buyer is concerned,” says Connie McCollister, real estate agent at DC Home Buzz. “Appraisers have to follow strict guidelines prescribed by Fannie Mae and lenders,” says Peter Grabel, a Connecticut agent. “There is a database that all secondary market appraisals go into, called Collateral Underwriter, or CU, that runs the appraiser’s report against a huge database of past appraisals and market data to confirm the findings are accurate,” explains Brian Koss, executive vice president of Mortgage Network. “It’s a very regimented process.”
These guidelines benefit buyers: They help prevent appraisal fraud, such as lenders pressuring appraisers to inflate the home’s price so that a deal can be made. But some appraisers, to avoid being accused of this deceptive practice, appraise lower than they probably should. Ideally, homes should appraise at their true market value. But although you can’t influence the appraisal amount, you aren’t powerless.
2. Know the neighborhood comps
You can take the seller’s word that the house you want is worth what they say it is. But unless you’re paying cash and don’t mind throwing extra money around (lucky you!), it’s always good to know what similar homes in the area have recently sold for. Besides checking recent sales prices on Trulia, “Ask your broker to show how they arrived at valuing the house so you can justify your offer price,” says Koss. If there are low comps in the area from short sales or foreclosures, for example, the appraisal could come in lower than your offer. Help guard against this by having your agent ask the lender to use a local appraiser who would be more likely to know the value of the home you want to buy. You can’t ask for a specific appraiser, just as you normally can’t request a certain teacher for your child. But you can request an “experienced” appraiser or a “local” appraiser.
3. Speak with the appraiser before the report is made
Why not request that your agent be on-site when the appraiser is there? “Your agent should provide printouts of recent sales (both on-market sales and off-market sales) that justify the purchase price,” says Joseph Montemarano, a California agent. If your agent can’t be there, at least have them communicate with the appraiser.
“Communication is key,” says Peter Grabel. “If the agent is aware of any concerning issues, [they can] provide information to the appraiser before the report is generated.” Maybe the appraiser doesn’t know about the mold issue in the nearby home that just sold or the divorce that led to a quick sale, causing those comps to be lower.
4. Recognize the reasons for low appraisals
Use your knowledge of the area to inform the appraiser, who might not be aware of local factors as intimately as you are. Here are some issues that account for low appraisals, says Grabel:
- Home prices in your area are increasing so quickly that the comps that sold six months ago don’t yet reflect this improvement.
- There aren’t adequate comps in your area, so the appraiser used comps from a less desirable community.
- The house you want has a much better view than the house that sold down the street, which overlooks power lines.
- Your house has a beautifully finished basement with a bedroom and bathroom. (Appraisers are required to use a lower value per foot for space below grade.)
- Your house has a pool or high-end landscaping, which didn’t lead to a higher appraisal.
5. Look over the appraisal report and ask about a revaluation if warranted
You have the right to see a copy of the appraisal report. Look it over as carefully as you look over your credit card statement each month. (You do that, right?) “If it has been found that errors or omissions exist within a report, it should be and will be corrected,” says David P. Anzueto, vice president of Atlantic Coast Mortgage LLC. “And perhaps the result is in fact a higher value.”
If the house doesn’t appraise somewhere in the vicinity of the price you and the seller have agreed on — despite your efforts — you can ask for a revaluation. This tactic isn’t always easy to do and will cost you another appraisal fee. The exception is an FHA appraisal, used if you’re getting an FHA loan. “An FHA appraisal will follow that home for the subsequent four months and will not be able to be revaluated,” says Maryjo Shockley, a Wellington/West Palm Beach, FL, agent.
Have you encountered a low home appraisal? Share your experiences and tips in the comments!