How to Fight a Low Appraisal—The Review Process Can Work (If You Do Your Homework)

You know the saying “Cash is king?”  Well, it’s even truer in today’s appraisal environment.  Bank underwriters are still holding appraisers to a ridiculously tough standard in this economy, so treat a cash buyer nicely if you’re lucky enough to have one.  Even though our local market is improving, banks are reluctant to appraise homes at a value that sets a new high in a neighborhood.  We have recently seen banks give a low appraisal on a house that received multiple offers over its’ list price.  Their concern is not market forces or where a willing seller and buyer will agree.  They want to protect their investment, which often means a smaller loan or lower price to give the bank some cushion in the next downturn.

Thankfully, we are not powerless to respond.  Armed with current comparative sales (comps) information, we successfully fought a low appraisal this month and helped both the buyer and the seller where their interests’ aligned.  The seller was spared a large reduction in the purchase price that would have come straight out of their net, and the buyer received the larger loan amount and a smaller down payment he sought.  The relative difference in higher sales price and property taxes was worth it for the buyer who wanted to preserve cash for remodeling.  It was a win-win for all involved.

So, how did we do it?  First, if you’re choosing between more than one buyer, find out what type of lender they are using.  A buyer applying with a bank that plans to go with a government backed product will have much less control over the appraiser.  Private banks and direct lenders who fund and keep their own loans can give appraisers more latitude and tend to have greater freedom with guidelines.  Remember too, that a large down payment will give any lender increased confidence and perhaps result in less indirect pressure on an appraiser to scrutinize value.

Next, before you head down the path of fighting an appraisal make sure you have a good case.  All sellers want the highest price possible, but if there is a loan involved, the sales price must be justified by the comps.  Carefully review the comps used in your appraisal.  Ask the following questions:

  • Did the appraiser use the best comps?
  • Are the comps recent?
  • Were any supporting comps left out, and why?
  • Did the appraiser make proper adjustments for square footage, condition, location, etc.?
  • Were the pending sales comps closing estimates in line with what you know to be their eventual closing price?
  • Since the appraisal, have any of the pending comps closed escrow at values that support your sales price?

A good listing agent who is familiar with the sales in the neighborhood should be able to gather the evidence to present your case to the lender.  This due diligence is the first part of the equation.

The last part is careful, respectful communication with other listing agents, the buyer’s agent, the lender, and the appraiser, if necessary.  Poor communication can doom your cause.  Lashing out—even with proper cause—will result in the door to a review appraisal being slammed shut.  This hurts your transaction and ultimately results in lower property values in your neighborhood, which hurts everyone except the buyers trying to get into said neighborhood with the next listing.

If all three of the above are done well and your home was priced reasonably from the start, you stand a chance at prevailing with a low appraisal review.  Keep in mind that it involves a bank who is willing to work with you to get it right for all involved.