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2012-05-02 13:56:15
How to Challenge that Low Appraisal

A low appraisal can prevent you from buying or selling a home at the price  you have negotiated. Here's what you can do about it.

By Michele Lerner of HSH.com

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How to challenge that low appraisal (© Gregor Schuster/Getty Images)

 

© Gregor Schuster/Getty Images

 

In the volatile real-estate market of the past several years, prospective  homebuyers and refinancers have encountered the same frustrating obstacle: a low  appraisal.
 

 Why appraisals can come in low

A low appraisal is not  necessarily wrong, but it does create a situation in which a lender may not  approve the loan. Simply stated, appraisers compare the value of a home with the  comparable properties, or 'comps,' in the surrounding area.

 
Home affordability calculator
 
Buyers and refinancers often run into trouble when lenders use an appraisal  management company to hire an appraiser who doesn't know the local nuances that  could affect home values. In markets plagued by foreclosures or short sales, the  surrounding comps can weigh down the price of a home in good standing. Or, if  there have been few home sales in a given neighborhood, appraisers may be forced  to look for comps in surrounding areas where market conditions and the homes may  be different.
 

'Appraisals are a moving target and are based on closed sales, which can be a  problem when there are few closed sales to use for comparable properties,' says  Carole Short, a sales associate with Coldwell Banker Residential Brokerage in  Dunwoody, Ga.

 
While homebuyers and homeowners cannot control a property appraisal, they can  influence and challenge it if need be.
 

Educate the appraiser

'I recommend that [real-estate  agents] and homeowners prepare written materials for an appraiser that include  information about home improvements and anything else they know about the  property that can improve its value. This can improve the chances for a higher  appraisal,' says Amy Tierce, regional vice president for Fairway Independent  Mortgage in Boston.

 

Stephens recommends that sellers be present at an appraisal. While lenders  are held at arm's length and cannot directly communicate with an appraiser,  real-estate agents, buyers and sellers are allowed to talk to the appraiser.  Agents can present the appraiser with information on comparable sales and how  they came up with their sale price.

 
 How to challenge a low appraisal

An appraisal dictates  how much money lenders are willing to lend to a borrower. If a home's value is  determined to be less than the preapproved loan amount, the lender cannot  approve the loan. Buyers have the following five options when challenging a low  appraisal:
 

1. Cancel the contract. Short says that almost all sale  contracts today are written with an appraisal contingency that allows buyers and  sellers to cancel the contract if the appraisal comes in too low.

2. Negotiate a new deal. 'Buyers are allowed to challenge a  low appraisal, but usually they prefer to renegotiate the contract,' Short says.  'A lot of buyers are actually excited if an appraisal comes in for $20,000 less  than they offered because they assume they can negotiate to buy the house they  want for less money.' But that's only if sellers are willing to accept the lower  price, which many times they're not.

3. Pay extra. 'Every negotiation is specific to the  individual circumstances of the contract, how much the buyers want the house and  whether the sellers are willing to drop the price or assist with the financing,'  Short says.

  • all sellers are willing to negotiate, however. So sometimes after an  appraisal comes in low, buyers must pay additional cash in order to meet the  agreed-upon sale price. Tierce says negotiations should be as creative as  possible, including seller financing or other concessions.

4. Challenge the paperwork. Stephens says the individual who  pays for the appraisal, typically the buyer, can request a copy of the appraisal  and review it. Short says real-estate agents and buyers would need to provide  additional facts about comps or point out mistakes regarding such items as the  number of square feet or the number of bedrooms.

'You should check the comps to be sure they have geographic relevance and the  same interior and exterior features,' Stephens says. 'You can also hire another  appraiser to do a review of the appraisal for an additional cost.'

5. Request a second appraisal. 'If a challenge or a review  doesn't change the appraisal, then a buyer can ask their lender to hire another  appraiser,' Stephens says. 'Be sure to request someone with geographical  knowledge and someone competent and explain why you are asking for a second  appraisal.'

Short says either the buyer or the seller can challenge an appraisal or even  request a second appraisal. 'A challenge should be based on specific errors  rather than opinions.'

 

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