Real estate appraisals are important because banks, credit unions, and other lenders want to know that if they lend a buyer $200,000 for a house, that should you default on the loan, the lender will likely get at least $200,000 should the buyer the property becomes the lenders.
One key fallout of the housing crisis of 2008, was that certain banks had cushy deals with certain real estate appraisers who played fast and loose with the numbers. As a result of stricter rules that went into effect in 2010, banks generally order their appraisals from Appraisal Management Companies, who work with a number of trusted, licensed appraisers.
What are the General Details of an Appraisal?
Appraisals include a number of factors including:
- Property details and side-by-side comparisons
Listed will be details about the property, along with specific side-by-side comparison properties
- A global look at real estate in your area
Included will be an appraisal and overall evaluation and comprehensive look at the real estate market in the area of the appraisal
- Devaluating issues
Statements about issues that devalue the property such as the house is located next to an auto salvage yard, or a nearby bridge is out and you can get to the house from only one direction.
- Serious Infrastructure Problems
If your house has a crumbling foundation or one of two bathrooms doesn’t work because of a tree root problem, the appraiser will take note of it on the appraisal report.
- Sales Time Estimate
The appraiser will estimate how long a house will likely remain on the market before selling.
- The type of Home or Business Property
Is the house on a large lot, surrounded by other properties with similar lots? Or is it jammed within five feet of another house?
Methods of Appraisal
There are two common methods of appraisal for residential real estate:
- The Comparison Method
Here, the appraiser uses three houses within the neighborhood, that have sold within the area. These are not straight-up comparisons, as the three comparison houses may have all had three bedrooms, while yours has four bedrooms.
But making adjustments, either positively or negatively, the vast majority of appraisals are fairly accurate.
- The Cost Approach Method
Generally used for fairly new built homes, the appraiser estimates how much it would cost to completely replace the home if it was somehow destroyed due to an Act of God such as a tornado.
Appraisals Gone Bad
An undervalued appraisal can throw a real monkey wrench in the buying process. If you bid $250,000 for a house and are counting on borrowing $225,000 from the bank to finance it. but the appraisal comes in at $190,000 that’s a serious gap for the bank to consider financing the loan.
What can cause a poor appraisal? There can be several problems, including:
- Obvious Mistakes
If an appraisal says your home has three bedrooms when it actually has four, this is a clear and obvious problem.
- Poor Comparisons
This is the most frequent problem with poor appraisals. Whether pressed for time or sheer ignorance of the neighborhood, an appraiser may:
1. List comparison sales that aren’t near close to your home
2. List comparison houses that aren’t near equal quality to your home
3. List comparison houses that were sold a year or more ago (not in the last 90 days)
4. The appraiser might have included one or more foreclosed properties
5. Missing permits. Some homeowners add a second story to a home and expect the resultant addition to show up on an appraisal. However, if you’ve misplaced the building permit, the appraiser has no choice but to ignore that second story addition.
6. A recent comparison sale within the last 30 days that was not considered in the initial appraisal.
What to Do If You Want to Challenge the Appraisal?
Write, a formal letter to the bank, asking that they ask for a revaluation from the appraiser. Keep negative emotion out of it, and simply state, in a business-like way, the reason (s) you feel the initial appraisal was faulty.
Attach copies of everything in error, such as photos and addresses of more in-line comparison sales and have your real estate agent review your letter to fine-tune the language.
Also, this is a good time to evaluate your lender. If they will not agree to request a re-appraisal, or ask you to pay for it, It might be time to find a different lender.
Most banks, given reasonable, business-like documentation, will, in fact, ask the appraiser to take a second look.
Also, don’t forget to include any recent updates in your house such as a new roof or a new furnace that the appraiser may have ignored.
And if the part of the problem was due to missing permits, by all means, go to city hall and get fresh copies.
Be sure you contact your bank before writing your letter, as the bank may have an official form in place that you need to fill out.
Assuming the appraiser does agree to a reappraisal, have your real estate agent contact them and ask for a meeting. While an appraiser may be hesitant to meet you as the potential buyer, they most likely will be willing to meet with your realtor, who can go point by point, through how they feel the initial appraisal wasn’t accurate.
Finally, if even after requesting a formal reappraisal, it comes back essentially the same, get a second appraisal. You will very likely have to pay for this, but it’s possible the seller will share the costs rather than risk losing the sale.
If getting a second appraisal seems the only option, then seriously, the best solution may be to approach a different bank and start over.