When a seller agrees to your home purchase offer, a low appraisal from your lender's appraiser can definitely be discouraging. However, you have options to contest a low appraisal. Before contesting the appraisal, you need to know the property's worth well enough to decide if you'll take this step. Let's look at the different choices and tactics you can use to handle this issue and make sure the house you want gets a fair assessment.
Understanding the Appraisal Process
A real estate appraisal formally estimates the property's fair market value. To challenge a low appraisal, the first thing to understand is the ins and outs of how appraisals work. When you apply for a mortgage loan, your lender bills you for the appraisal and then starts the process by requesting it from a list of approved licensed appraisers, usually after you remove any due diligence or inspection contingencies you and the seller agreed on. The appraiser's value is influenced by several things, such as the property's condition, location, data from similar sales, and current market patterns. The appraiser includes all these findings in a document called the appraisal report.
Reviewing the Appraisal Report
If your lender notifies you of a low appraisal, ask for a copy of the report so you can scrutinize it and decide if you want to challenge it. Examine the report details for discrepancies or errors, such as inaccurate property information or missing comparable sales data. Review the appraisal methodology and evaluate whether the appraiser left out essential information that undervalued the property. The purpose of this review is to make sure that the appraisal accurately reflects the property's value.
Gather Additional Information
If you disagree with the report and believe it doesn't accurately reflect the property's value, try working with the seller and the real estate agents to gather additional information. The seller might have documentation of recent upgrades or renovations to the home, any unique features that add value, or comparable sales in the area that justify a higher appraisal. While real estate agents cannot perform appraisals, they might be willing to provide you with a market analysis of sales activity in the neighborhood around the property. You can strengthen your challenge of the report by presenting hard evidence that supports a higher value.
Seek a Reconsideration of Value
To request a reevaluation of value, you must make a persuasive case for why the initial appraisal may not fully capture the property's market value and why an adjustment is necessary. This process involves requesting your lender to reconsider value, providing the data you collected on recent comparable sales, emphasizing unique features or improvements to the property, and pointing out any errors or oversights in the initial appraisal report. The ultimate goal of this step is to present a convincing argument to the lender in support of a higher property value so your request for reconsideration gets passed along.
Ask for an Appraisal Review
Once your lender has all of your supporting information, they might request an appraisal review from a review appraiser. A review appraiser is a licensed or certified appraiser who evaluates another appraiser's report. This review aims to provide feedback to ensure that the appraisal complies with professional standards and regulations and that the appraiser's conclusions are correct.
Hiring a Second Appraiser
You could also discuss bringing in a second appraiser for a new appraisal. Because this will cost you more and take longer, make sure the seller is willing to extend the appraisal and financing contingencies long enough for this to happen.
Negotiate with the Seller
If you've already tried everything to increase the value but haven't been successful, try negotiating with the seller to lower the sale price to match the appraised value or offer a financial concession to bridge the appraisal gap*. Alternatively, you might have to consider covering the gap yourself. If these options fail, the value is likely not there, and you'll probably have to walk away from the transaction.
*The appraisal gap is the difference between the sale price and the appraised value. You'll probably have to walk away from the transaction when these options don't work.
Conclusion
Dealing with a low home appraisal can be overwhelming and time-consuming. However, if you are proactive and well-informed, you will improve the chances of a positive outcome. Being well-prepared, confident, and assertive when challenging a low appraisal also helps, as it can lead to a successful resolution, benefitting both the buyer and the seller.
Additional Resources
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(C) 2024 Jeff Sorg
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