No matter what you think your home is currently worth or what you and the sellers agree to, it’s the appraiser who has the final say. On the standard loan application, when someone is refinancing an existing mortgage there is a section that essentially asks, “How much is your home worth?” and the applicant puts in a number. Maybe the number comes from a listing down the street or a home that just sold. The applicant goes ahead and enters an amount and the mortgage company then orders the appraisal. But the lender doesn’t order the appraisal directly from an appraiser but from an Appraisal Management Company who then, randomly, assigns an appraiser from its collection of approved appraisals.
In the instance of both a sales contract and a refinance, the appraiser follows the same basic steps, the only difference is there is a sales contract that shows what the buyers and sellers have agreed to. The appraiser initially does some research before visiting the property by reviewing recent sales of similar homes in the area and then make adjustments depending upon certain features of the subject property compared to others. After a few days and a visit to the home, the appraiser arrives at a final figure and delivers it back to the appraisal management company who then forwards it to the lender. Most of the time the value comes in as expected or even a little bit higher. But sometimes it doesn’t. Sometimes it comes in lower. Here are some options:
Lenders can review the completed appraisal and see if there are any obvious errors. This doesn’t happen very often, as appraisal software pretty much eliminates any math mistakes but appraisers are still human and mistakes can be made. For example, the appraiser may have checked the box that said “two bedrooms” when clearly there are three. These are the types of errors that we can get corrected but again, we’ll need to provide this information to the appraisal management company.
Sometimes what is considered valuable to a home owner isn’t really all that valuable to the appraiser or to others. If you think your tulip garden is absolutely gorgeous and you spend hours tending it, that’s more of a personal preference, not a value-add.
“Comps” is the moniker for comparable sales. They’re the properties the appraiser used to compare your value to theirs. But comps must follow certain rules. Appraisers are supposed to first look only at properties that are similar to yours and the most important of these might be the one closest to the subject property. A comp one block away will carry more weight than one listed at a half-mile away. Did the appraiser miss a comp? Is it obvious the appraiser simply glossed over a comp that will support your value?
If this is the instance, let us know and we can again contact the appraisal management company to have the appraisal redone with the missing comp included.
It’s also possible that a comp was missed because the home was sold by the owner and not listed with a real estate agent. If it’s not in the multiple listing service and was a direct “for sale by owner” transaction, the appraiser didn’t know about it because there was no record of it being listed or sold.
We can also ask your real estate agent to meet with the appraiser and compare notes. Your agent put together a comparative market analysis using data from the multiple listing service, the same resource the appraiser used. Careful though, when appraisers “put their name on it” it’s going to be a challenge to get the value changed but it’s another option for us.
One More Time
If these solutions don’t help, another way is to order a new appraisal. Yes, you’ll need to pay for another but getting a second opinion from another licensed appraiser can either bolster your opinion and get a newer value or it can confirm the value of the first appraisal. Appraisers will tell you that performing an appraisal is both a science and an art. There are hard numbers to look at and comparisons made but the appraiser will also have an opinion. With two independent, separate appraisals, and especially with a refinance application, it’s likely there will be two different values, albeit it similar ones.
Finally, if all these options fail, you have some choices to make. If you’re refinancing and the value is too low, you can consider paying down your mortgage balance to meet the necessary loan-to-value requirements. If you’re buying, you can ask the seller to renegotiate the price. If the seller says no, you’ll either need to pay the difference or walk from the contract.
Most of the time, appraisal issues aren’t a problem but when they are, it’s not the end of the transaction. We do have some options.