How Do You Challenge an Appraisal?

How to Challenge an Appraisal

Have you had an appraisal “come in low”? If so, you’re not alone as the “appraisal wrinkle” is causing chaos with both purchase and refinance transactions. How do you challenge an appraisal?

Appraisal challenges continue to increase as the market struggles; 10 percent of the nation’s Realtors said they had sales canceled because appraisals came in below the prices buyers agreed to pay, according to a recent survey by the National Association of Realtors. Another 15 percent said contracts were renegotiated after appraisals came in below contract; sellers dropped prices or buyers put up more cash. 33 percent of home builders said they lost sales because of low appraisals, according to the National Association of Home Builders. If you’re on the receiving end of a low appraisal, how do you challenge it?

What are the options for challenging a low appraisal?

Assuming that you have a copy of the report, the first step in challenging an appraisal is to objectively review it. Your home is worth others like it are selling for; what you paid, think, what you put into it, what the neighbors say, what it’s assessed for…..doesn’t matter. If after review you find genuine issues, contact the lender. In this environment, management companies have been established to ensure no undue influence between lender and appraiser; lenders cannot typically have direct contact with appraisers so they will need to go back through the management company. It’s pointless to just cry foul, provide tangible evidence to the lender to support your position as they should forward this to the management company for the appraiser to review. If your challenge isn’t legitimate and based upon errors of fact, don’t waste everyone’s time; unsupported opinions are not errors.

Think like an appraiser

If you want to challenge an appraisal then think and act like an appraiser. That starts with understanding how to measure a home, what constitutes living area, positives and negatives…. A few things to know:

  • Finished basements are finished basements – not living area
  • No improvement returns dollar for dollar
  • Appraisers measure the outside of homes; some use lasers, some tapes, some wheel, some round…others don’t. No two appraisers will measure a home the same way
  • Condition and maintenance level matter, good condition is expected, poor condition will be detailed
  • If your home was listed for 100K and failed to sell, the appraiser will see that. Don’t expect a 100K appraisal
  • If your home has been on the market for a longer than usual time, the appraiser will determine why
  • If you just bought the home, don’t expect the value to increase

Their estimate of value is based upon comparable sold homes (comps) in your area that meet certain criteria. Ideally, this includes:

  • Closed within six months preferably but not over a year
  • Be located within the defined competing area, typically under a mile
  • Be physically similar to your home – style, bedroom count, size, age, lot, location
  • They should be a “reasonable alternative purchase” to your home; the comparables should be functionally equivalent to yours with similar appeal. If your home were offered for sale, the comps would be other purchase options to it.
  • Do not waste time with active listings, they are not credible as the market has not acted upon them

Key steps to challenging an appraisal?

After you contact the lender about the appraisal, you need to assemble credible support for your position. Review the report for any reasonable factual errors and ensure that all of the “positives” about the home are noted. A word of caution, differences surrounding square footage of the home are common. Finished basements are not included in living area – you need to understand how square footage is considered in reports.

In most appeal situations, it comes down to comparable data. Your best source of comparable data is the MLS and public records. If you know a real estate agent, ask them for a favor in pulling comps, it shouldn’t take an experienced agent long. Do not depend on the public web sites for comp data, which is not often reliable information. If you don’t know an agent, rely on the public records or contact another appraiser for an opinion. Some appraisers will do a limited data search for a nominal fee; this is not an appraisal, merely data collection. If you feel strongly enough, hire an independent appraiser and submit that report.

Common mistakes to be avoided when challenging an appraisal

If you perceive that the estimated value was low, do not take it personally. The single most common response is to pile on comps that have no bearing on the report. Many real estate agents don’t understand the process and further confuse things. Appraisers get paid to complete reports, not handle appeals so there is no reason for them to “come in low”. After review, enumerate the points you feel are in error and detail why. Do not waste time with nonsense issues; as noted above; understand what the appraiser does, how they do it and what constitutes credible data. You will lose if you “feel” you’re appraisal was low; bring solid data because that is all that matters.

What are the chances that an appeal/dispute will lead to change?

In this environment, unless grievous mistakes are noted most appeals fall short. The restrictive environment for appraisals and the “check the box” underwriting has reduced many appraisers to form fillers. Reports are typically reviewed as part of the underwriting process and it’s common for computer valuation models to be run. These are programs that review statistics from the area to determine trends and value ranges. Reports are also subject to both desktop and field review by other appraisers. In short, the data is reviewed at several levels and inconsistencies noted. Understand as well that this is an opinion based upon closed sales available at the time of inspection; data could come available that changes things after the fact. To some extent, appraisals are subjective but the crux of the report is based on hard data; your home and the comparable sales available.

Appraisers have no interest in “coming in low” with any assignment; their objective is to provide an accurate, impartial opinion of value on your home at the time of appraisal. The idea that lenders are instructing appraisers to “low ball” is floating around – and it is total nonsense. Like every other aspect of the real estate business, but maybe more than most, the appraisal business has become one major migraine.