You won a hard fought bidding war! You went 10% over the asking price, which may be a stretch, but, by golly, you are buying this home! You have delivered the earnest money, ordered an inspection, and are working with a lender to submit all your application. All is humming along, and then...uh-oh, the appraisal comes out too low. Deep breath. What does this mean?
Let's back up and talk through this. A mortgage lender will usually only fund a home loan based on its appraised value. Let's say you have a contract in place to pay $500,000 on your home and intend to use an conventional loan with a 80/20 LTV (Loan to Value Ratio), however, your appraisal comes out to be $475,000. This means the bank is not going to be willing to fund the loan amount you may require to close the deal. If you are not able to make up the difference between the appraised value and the loan amount with your own cash, then you may have to ask yourself if you want to try and pursue an appraisal challenge.
We found some tips from Ryan Lundquist of the Sacramento Appraisal Blog that you may find useful. Lundquist, an experienced appraiser in Northern California, share tips here on how you can work with your realtor and lender to appeal the appraisal. As an appraiser himself, his advice is like hearing insider information. While we hope you don't ever need these tips, if you do, here are the insights about challenging an appraisal that we thought were valuable:
- Be Reasonable: Be realistic about what a property is worth. Try to help the owner base the list price on actual similar sales and whatever the current market is doing in the neighborhood for similar properties.
- Ask the Lender: Before launching into a rebuttal, first make sure to ask the lender what their process is for challenging an appraisal so you know you are spending your time wisely. They might have their own form. Remember, a reconsideration of value has to come to the appraiser from the lender.
- Wear your Data Hat: It can be emotional when a property appraises too low, so it’s important to remain objective and stick to the facts of the market when talking with appraisers. Focus on critiquing the meat of the appraisal, which is comp selection and adjustments given (or not given). Forget about minor issues or clerical errors that don’t really sway value.
- Price Per Sq Ft: I recommend giving most of your attention to similar sales rather than bringing up price per sq ft. At the end of the day price per sq ft can be a valuable metric, but during an appraisal rebuttal it’s important to focus on sales that are similar since that is probably what is going to be most useful for the appraiser.
- Be Humble: It’s easy to blast the appraiser because you think you’re right, but the appraiser might have nailed the value. Remember, some appraisals come in low because the appraiser did a bad job, but many times properties come in lower than the contract price because that’s really where value is.
- Be Short and Sweet: There is a better chance of being heard if you keep it short. Don’t write a novel (and it helps if you’re diplomatic and nice). This is why the format above is useful because it helps organize thoughts into a logical manner.
- Don't Apply Pressure: Remember to not pressure for a higher value. Stick with the facts and try to help the market speak for itself. That’s the value of the sheet above because it helps focus the conversation on comps and adjustments. You are asking the appraiser to reconsider the value, not meet your contract price. In fact, don’t even suggest a target value for the appraiser to meet. With some focused communication, you can provide support for a higher value without saying, “it’s worth at least X amount”.
At Louisville Realty Associates, we appreciate all work that appraisers do to get this much needed piece complete for the buyer, but we also know that sometimes there are bumps in the road. At LRA, we have the experience, energy and depth of knowledge to help you not just survive your transaction, but we make sure you are fully informed and educated as you make various decisions. You can reach us anytime at firstname.lastname@example.org.