Westcoe Realtors, Riverside Ca…This question raises one of the most frustrating situations a homeowner and a real estate professional has to endure. Nothing is more frustrating than having an outside entity (the appraiser) ride in at the last moment and torpedo your transaction. There are a lot of spokes to this wheel of appraisers, and we will try our best here to stick with the generalities that may help you if you find yourself wrestling with this issue.
Before we can give you our answer to the above question, we need to know if you are re-financing your home, or selling it…because the difference with respect to lenders and appraisers is night and day.
If you are refinancing.
If you are refinancing, then the lender has far more leeway in what they can and cannot do with regards to appraisals. With a refinance, most of the time, the lender will not allow a homeowner to borrow more than 70-75% of the value of the property. Therefore, since there is a 25%-30% “pad” in the equity in the home, lenders view this type of loan as far less risky than a purchase transaction. In their minds, worst case is that if you default on the loan, they have plenty of equity to work with to protect their loan. Mind you, this is not their plan, but a lender always has to have a “plan B” with regards to any loan in case you cannot make the payments…and in a refinance, their “plan B” is the remaining equity you have left in the home.
Given this built in “pad”, many times a lender will do a desk-top appraisal, which is a fancy way of saying that the loan department simply goes on-line, checks the local comps from whatever database they use, and renders a value based upon what they see on their computer. No one comes to your home…they do it all at their desk…hence the name “desk-top.”
Again, the equity remaining in the home allows them some margin for error.
So…to answer the question about appealing a low appraisal in the case of a refinance loan, the answer is yes…appeals of refinance appraisals are far more successful and easier to accomplish because the lender has more control and more equity.
If you are selling your home
Now, things get a little sticky.
First, a home purchase loan can be done with 0% down for vets, 3.5% down FHA, or anywhere from 5%-20% down for conventional financing…which means seldom is there much of an equity “pad’ for the lender to use as “plan B.” In the refinance, they had 25%-30%…here they have way, way less.
Secondly, this means that there will be no “desk-top” appraisal, but instead a licensed appraiser will be coming to your home…and when that happens, the appraiser now takes some personal liability and becomes part of the lenders “plan B.” By this, we mean that if the loan is made, and the buyer defaults on the loan and stops making the payments, the lender will look to the appraiser to make sure that when the loan was made, the appraisal was accurate, and not over-estimated in any way. As a result, this has led appraisers to be very conservative on their estimates of value for any appraisal they do. This means that all the things that are subjective when valuing a home (pool values, view values, upgrade values, lot size values, to name a few) will normally be valued at the low end of the range, not the high end.
The net result here is that in many cases, the appraised value for a home will be higher for a refinance than for a sale. Not fair, but such is the real estate world we live in.
So…how do you appeal a low appraisal in this case?
Generally, you don’t…and here is why.
First, the person who decides whether the value has been missed, and now needs to be adjusted upwards (hopefully) is the same appraiser who made the original appraisal. In other words, by appealing the original appraisal, you are in essence telling the appraiser that he/she is an idiot, missed the original value, is unprofessional, etc…you get the idea. In the judicial court system, how many rulings would be overturned if the person who made the original ruling was the same person who now gets to hear the appeal? You can see the picture.
Secondly, to even begin an appraisal review, you must have data on comparable sales that are both different and unavailable to the appraiser when the original appraisal was made. Again, the idea here is that you cannot simply tell the appraiser to raise the value of some of the subjective items noted above…you must have new information. Without any new data, it simply looks like you are trying to “strong-arm” or bully the appraiser, which the Dodd-Frank lending changes made a huge no-no.
So, in the end, where are you? Most of the time, the easiest way to combat the low appraisal is for the buyer and seller to work it out…buyer pays a little more in cash, and the seller lowers the sales price a little, which means no one is very happy, but the rock wall that is the appraisal world becomes the immovable object in your transaction.
Good luck, because if this all seems unfair, it is…but it’s the world in which we currently live.