A couple of days ago I wrote an article about appraisals and how they are completed. That article explained why banks use appraisals and the basics of valuing a home. Many times an appraisal will come in low, especially in an appreciating market. Low appraisals can kill deals, but there are ways to challenge an appraisal or help the appraiser come in at value before the report is completed. Some appraisals will also require repairs to be made on properties before closing which can also kill a deal. There are also many things you can do to help prevent an appraiser calling out repairs.
▼ Continue Reading Below
How can low appraisals cause a deal to fail?
Lenders require an appraisal on most loans and the lender will only loan on the value the appraisal comes in at. If the lender will only loan on 80 percent of the value of a home and the appraisal comes in less than the contract price, the buyer will have to bring more money to closing or the seller will have to lower the price. If the seller does not want to lower the price or the buyer does not want to bring more cash for the property, the deal will fall apart. If a FHA appraisal was done on the home that value stays with the property for four months. The seller can not find another FHA buyer and hope that a new appraisal comes in higher until four months has passed.
How can you prevent low appraisals?
I am a real estate agent and I have to deal with low appraisals all the time. I have had low appraisals on many of the houses I am selling or for buyers that I represent. However, there are many changes we have made over the last couple of years that have helped reduce the amount of low appraisals we see.
- Give the appraiser comps to use. I was skeptical about doing this, because I did not know if was ethical or legal to give comparable sold properties to the appraiser. When I do broker price opinions for banks I am not allowed to take comparable sold properties from the listing agent or anyone involved in the transaction. However, the real estate commission in Colorado recommends agents provide comps for the appraisers. When we see an appraisal is scheduled we provide as many similar sold properties as we can to the appraiser. I tell the appraiser that he is welcome to use these if he would like too, but I never pressure him or her into using my comps. I make sure the comps support the value that our contract is for and if there are any abnormalities (distance from property, SQFT etc) I explain in detail to the appraiser why I chose those properties. Most appraisers are very grateful and this has helped values come in much higher.
- We tell the appraiser what repairs have been done if the home. This lets the appraiser know the home may be in better condition than other similar sales in the area he may use as comparables. It also helps to justify fix and flips I complete when the price I sell it for is much higher than the price I bought it for.
- Be prompt returning calls or emails from the appraiser. I try to be as professional as possible with all appraisers. I don’t want to give them any reason to get annoyed at me or the property. If the appraiser calls me, I will call back as soon as I can or email them back right away. If the utilities have to be on I make sure they are on or explain why they can’t be turned on so he does not have to make multiple trips back to the house.
- Make sure the house is clean and looks great. First impressions mean a lot to anyone. If your house is completely remodeled, but has junk all over, is dirty and cluttered the appraiser may miss all the remodeling work. Present the house to the appraiser like you would a regular buyer.
If you treat the appraiser right and give him comps that help justify the value, you will have much more success getting appraisals to come in at value. If you are not an agent, make sure your agent is doing these things for you.
Can you challenge a low appraisal?
Even after sending in comps we still have some appraisals come in low. Unfortunately the system is set up so that appraisals will come in low in an appreciating market. The appraiser has to base his value off of sold houses. If prices are going up, then there is a very good chance a house that is under contract now will have a higher contract price than the sold comparables from a few months ago. If you get a low appraisal, there are was to challenge it.
If an appraisal comes in less than the contract value on a home you can ask the lender to challenge the appraisal. Usually there has to be something wrong with the appraisal and you need some really good comps to prove the value should be higher. I had a VA appraisal done on a house a couple of weeks ago for some buyers. The appraisal came in $7,000 low on a new construction home. Luckily there were some major flaws with the report and we were able to get the appraisal raised.
- The appraiser used a house that was 16 years old and over 2 miles away from subject.
- The appraiser used a house that was 11 years old and over 1.5 miles away from subject.
The house that was being appraised was brand new and in a suburban area with many new construction sold comparables available in the same neighborhood. I have no idea why the appraiser used these comps when so many other properties had sold in the same neighborhood in the last six months. I provided six comps that were very similar to the subject in price, age and location. The lender challenged the appraisal using those comps.
There is no guarantee the appraiser or appraisal management company will change the value, even with gross errors in a report, but it is worth a try. I have had other appraisals with worse values that were not changed and on one occasion an appraiser raised his value by $30,000 after we sent him comps. On this particular deal the appraisal was not brought up to the full contract price, but the value was raised $3,000 and the seller agreed to lower the price to make it work for the buyers.
When you challenge an appraisal you (or your real estate agent) have to be able to provide comps that clearly support value and are superior to the comps used in the appraisal. Or you have to find facts that are wrong in the appraisal. If the appraiser said the subject only had a one car garage and it had a two car garage that is a fact that can be challenged. If a low appraisal comes in, don’t rely on the lender to look it over and decide if they want to challenge it. Look it over or if you are not a real estate agent, have your agent look it over closely. Look for any facts that may be wrong or anything wrong with the comps used. Was distance too far, age of the sale too old, square footage off, was a finished basement not included? In some cases the value is just low and there isn’t much you can do about it.
How do you handle an appraisal that requires repairs to be made on a property?
Not only can appraisals come in under value, but they can also require repairs to be made before closing. When you are using owner occupant loans with little money down, they will all require the house to be in livable condition. That means all the major systems must be functioning; heat, electric, roof, plumbing. There can’t be broken windows, holes in the walls, mold, chipping paint or exposed wires. When you are buying a house make sure you know what condition the lender will require the home to be in before you make an offer. Some sellers will make repairs on issues that hold up financing and others will not.
HUD will make no repairs on anything unless it is a safety issue. However HUD will allow FHA buyers to escrow repairs. Other REO sellers like VA, Fannie Mae, Freddie Mac will make some repairs, but it is all done on a case-by-case scenario. Traditional sellers may make repairs as well depending on how much money they have and what the repairs are. Don’t expect a short sale owner to make any repairs on a property.
I think it is best to ask the seller to make any repairs that you know will be needed in the contract. If you want to buy a house and you know the appraiser will ask for certain items to be repaired, ask the seller to fix those upfront. If you ask for repairs to be made upfront ad the seller won’t agree, you won’t waste weeks of time, an appraisal fee and an inspection fee. There may be some issues you can’t see or know about until an inspection or the appraisal, but ask for the seller to make repairs that you know will be a problem in the beginning.
If repairs are required and the seller will not fix them before closing there are a couple of options. The first thing you can do is ask your lender if the repairs can be escrowed. That means the buyer or seller will pay for the repairs, but they will not be completed until after closing. The title company holds the money to be paid to the contractor until the work is done. If the repairs cannot be escrowed you may be able to switch to a FHA 203k loan if you are buying as an owner occupant. The 203K loan allows buyers to purchase a home in bad condition, build money into the loan for repairs and have the repairs done after the closing.
If you are selling a house ad plan to sell to owner occupant buyers, make sure anything an appraiser may call out as needing fixed is repaired before the home is listed. If buyers see items that need repaired they may just move on to the next house instead of asking the seller to fix them. If you can’t make repairs then do not accept an offer that will require the repairs to be made.
If you have appraisal issues don’t give up hope! I know many lenders will not pursue these avenues unless they are asked. Many real estate agents will not pursue these options either, because they don’t know they exist. In some cases there is nothing you can do about a low appraisal or one that requires repairs, but it doesn’t hurt to try to get the value raised. Remember appraisal requirements are limited to owner occupants. Many investor loans will have the same repair and value requirements as well.