April 24th, 2015
Whether you’re selling or refinancing, getting a lower than expected appraisal is upsetting. There may be real reasons why your home valued lower than you expected, and there are some things you can do to get it re-evaluated. Lenders rely on appraisals to determine whether the size of a mortgage being sought by a buyer is justified by the market value of the home they’re looking to buy. They want to ensure that they will be able to recover their funds in the event they have to sell the home should the borrower default on their mortgage.
There are things you can do to ensure your home has the best foot forward before the appraiser arrives. If you did that and it’s still low, read on.
So what is an appraisal? Is it really the value of your home? In truth, the value of your home is what someone would be willing to pay for it. So an appraiser has to estimate based on the size and condition of your home, and the value of homes that sold nearby.
The appraiser reaches a value through three methods. The first is the cost approach, which is simply what would it cost to rebuild the house in its current location? The second is the sales comparison analysis. The third, the income method, is typically used only if the home is in an area with a lot of rental properties.
The cost approach is a best estimate of what it would cost to rebuild the existing structure exactly at current market rates. Then the appraiser depreciates the value of the existing house using a variety of methods. This is where you may have some wiggle room.
Finally, the appraiser compares your home to other home sales in the area. Ideally, they are in close proximity and sold within the past six months. If you live in a rural area, this could be difficult, and again, could provide you with some negotiation.
Point out and have documentation for all home improvements that may not be obvious to the appraiser. When they compare your house to the comps, they’re evaluating improvements. They want to know the quality of the update. So, if you added in a back porch with a roof, and another house didn’t have that, the appraiser would adjust the value of the other house to what it might have been had they provided the same updgrade. It seems a little backwards, but they need to do an apples-to-apples approach.
Review your appraisal. Federal law requires lenders provide the appraisal upon request within 30 days. Look for potential factors that the appraiser may have missed when comparing the property to similarly priced homes that sold recently. It’s possible your lot size is larger and wasn’t taken into account.
With the buyer’s permission, contact their lender and review any discrepancies or information that the appraiser didn’t consider in the assessment. Another option is to ask the lender to order a second appraisal for comparison purposes. If the lender agrees, that can run from about $200 and up, depending on the home. And there’s no guarantee the new appraisal will turn out any different.
You could talk to the buyer and see if they’re willing to pay what you feel the house is worth. Many buyers do not want to pay more than the appraised value, but you can always ask. Additionally, you can get the buyer to put some pressure on getting the appraised value adjusted.
Have you had an appraisal that you felt was off?