“I was told that the appraisal is one of the most important parts of my offer to buy a house. What can I do to make sure that it comes in at value so that the bank (or lender) will lend on the house I want?”
So how can you avoid a low appraisal?
The appraisal is extremely important – especially for buyers putting down small down payments (less than 10%).
If the property does not appraise for the value that you are wanting to either buy it for or sell it for, lenders will not lend and – as we very well know – no lending, means no purchase.
But what exactly is a low appraisal? There’s a big difference between an appraisal that came in 1% below value and an appraisal that came in 10% below value. The purpose of this article is not for the situations where appraisals are drastically lower than the purchase prices. It is for those situations where appraisals come in slightly below value and risk bombing a deal. For instance, if the purchase price is $255,000 and the appraiser brings the value in at $252,000. This situation happened to me and occurred because of an oversight in the neighborhood (a comparable was not noted as having power lines when, indeed, it did have powerlines nearby.) This article is for those small variations and how to attempt to prevent this.
Here’s a take by the Wall Street Journal on this issue: “Judgement Call: Appraisals Weigh Down Housing Sales.”
[. . .] some realtors, home-sellers and economists believe low-ball appraisals also are undermining a housing recovery.
Appraisals are supposed to be unbiased assessments of a property’s value. The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. Now, lenders are pressuring appraisers to come in with lower estimates, some real-estate professionals say. Banks also are using less-experienced appraisers, who often don’t appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.
There are a lot of educated, experienced, and knowledge appraisers who do wonderful work in the real estate market. Simply because a property does not come in at value, or low, does not mean that the appraiser did their job improperly. That may just be the value of the property. However, there may nonetheless be newer or less knowledgable appraisers that could use a bit of ground work to help them become more knowledgable about the area. This article is my opinion on how to ensure that an appraiser has a minimum amount of knowledge about a subject property as provided by the Realtor. This does not mean that an appraiser is obligated to even look at your packet, but it certainly does not hurt to provide them with information.
” REALTORS® and lenders can talk to appraisers, including requests to consider additional data or to correct errors.” ~Realtor.org
Steps to Preventing a Low Appraisal: Help the appraiser.
- Be there. Meet the appraiser. Whether you are the seller or the buyer, insist that your agent be present for the appraisal of the property. Often times appraisers are out of area appraisers and may not be familiar with the specific neighborhood. The agent should be friendly to the appraiser. Friendliness goes along way, especially considering that a lot of appraisers are used to angry agents calling them after an appraisal has been conducted because the appraisal came in low. A simply way to be friendly is to introduce yourself, give the appraiser your packet (see below) and let the appraiser do their job. Wait in the kitchen or in the yard and simply make yourself available to answer any questions that they may have.
- Prepare a Packet of the below items. If you can, put the papers in an inexpensive and labeled folder, or at least clip the papers together. Present this to appraiser with your business card and the line in number #8.
- Cover Letter: List all of the selling features of the subject property. The appraiser won’t know that the plumbing in the upstairs bathrooms has been redone within the last 5 years and has a 15 year warranty. List this! Tell the appraiser everything about the property that would not be noticed in a visual inspection. For instance, the concrete patio is heated, or the upstairs bathrooms have had new copper plumbing installed.
- Comparables. Have comparables prepared for the appraiser. Highlight the important attributes of each listing (address, date sold, square footage, price per square foot, days on the market, etc.) Use colored highlighters. Use yellow or red for the comparables and green or blue (soft, nice feeling colors) for the subject property.
- Notes. Go through each individual comparable listing and write notes that compare it to the subject property. For instance, on my most recent appraisal, the specific property had a significant amount of upgraded features. So on each comparable I went through and wrote things like, “Paints need updating, subj. prop. is move in ready,” “subj. prop. has upgraded kitchen or bathroom, this does not,” or things like “subj. prop. has new, laminate flooring throughout the house, this comp has carpet throughout.” Dates of installs, quality of material, etc. Write whatever you can.
- Map and Label. Print out an MLS or Google Maps map with all of the comparablesnumbered. Label on the map major streets, amenities, issues, or oddities. For instance, comp #2 sits on the edge of a very busy street. Comp #3 is situated under noisy power lines. Subject property is located on the edge of the largest green belt in the entire neighborhood and is distanced from the nearest street by a wide parking lot and another unit.
- Give the appraiser what they ask for: If the appraiser asks for the RPA (Residential Purchase Agreement), send it to them. Don’t forget. If they ask for the permits, get the permits and give the permits to the appraiser. I was recently asked for an RPA at an appraisal. Since I use DropBox on my iPhone and iPad, I immediately emailed the documents to the appraiser and he had them before the appraisal was over.
- List the Upgrades: Prepare a list of upgrades and warranties that the property has associated with it. The especially important upgrades to mention are not the visible upgrades, like granite counter tops and hardwood flooring, but upgrades that are invisible during a superficial-inspection. For instance, upgraded copper plumbing, a concrete patio with a heating system, an upgraded wiring system, a new ducting system, etc.
- Use this line (if you’re the agent). It should be clear that if the appraiser has any trouble bringing in the value of the property, they should call you and let you know. If you were friendly and helpful to the appraiser, they will call if there’s an issue.
[Name], if you have any trouble at all, please call me. I would be more than happy to send you more comparables and any information that you may need.
Clearly, none of the above steps are possible if no one meets the appraiser at the property. It is extremely important to meet an appraiser at the property, especially in a down market at the bottom of the real estate cycle.
Also, if you are a Realtor or an Appraiser and are wondering about the rules pertaining to what a Realtor can or cannot give or speak to an appraiser about, check out this PDF file by Realtor.org analyzing Fact vs Myth about Realtors and Appraisers.