Earlier this summer, a friend of mine was looking to buy a house and although their Realtor assured them that it was a slam dunk and everything was fine with their paperwork and they had a legitimately significant down payment, there were complications. In fact, their appraisal came in a little over eight percent short. You might not think that’s much, it doesn’t sound like much, really, but it’s enough to completely sink a deal — just like it eventually did for my friend. Despite their efforts, they just couldn’t come to new terms with the seller and ultimately ended up losing a lot of money for inspections and bank fees and that short appraisal.
Was it the appraiser’s fault? Was it the market’s fault? Was it the Realtor’s fault? Honestly, it was probably a combination of these things if I had to point some fingers around. The Realtor should have known what the market would bear. The market should have been stable and predictable. The appraiser should have been knowledgeable of the market where that house was located.
I don’t know what went wrong, I was simply standing outside looking in, but if our Closing Nightmares article (and reader comments) is any indication, my friend didn’t have a unique experience. If anything, this problem seems to be growing, so I thought it was high time to give you some tools in case your appraisal turned into the sticking point in your home buying process.
About Appraisal Management Companies and Collateral Underwriter
I was a Realtor in the good old days, before we drove the economy into the toilet (sorry about that). For our part, inflated appraisals played a big part. And it wasn’t, you know, because we were trying to be jerks or anything, the end goal was to get everybody — and I mean everybody — into a house for as little out of pocket as possible. That meant sometimes pushing neighborhood values to the absolute edge of what was potential in order to get enough funding to cover everything a buyer needed. And that was all fine and good for the first go, but when that same house came around again in three or five years, well, we had a big problem.
That same seller now needed to wrap their commission, plus the new buyer’s fees, into the sale. So, a house that started at $100k for the first seller (with a final closing price of $106k to include fees) was now pushing $120k as a resale contract in order to cover the six percent seller’s fees plus the six percent buyer’s fees. The local market was gaining value rapidly, but only just enough to keep up with this kind of madness, which, admittedly, we, the real estate industry as a whole, were making a lot worse.
After that house of cards finally fell apart, safeties were put into place to protect the real estate market, as well as the long term prospects of both buyers and sellers if they chose to sell their homes way ahead of average time frames. Banks got rid of the zero down loan, as you all know, but arms length transactions with appraisers became the norm, as well.
Today, more likely than not, your banker has no idea who will be hired to do your appraisal. They probably contract with an Appraisal Management Company. They take over the ordering and follow-through with appraisers that were tasks once shared between bank administration and the Realtors in the transaction. So in some ways they’ve made the job a lot easier, but in others they’ve made it tricky. Depending on the area, there could be complications added by an AMC, such as bringing in an appraiser that isn’t familiar with the area. The added layer of administration also means an added layer of fees, which is why your appraisal probably costs a lot more than it did in 2006.
Collateral Underwriter, however, is helping to even out the playing field a bit — and it’s also sort of making the problem worse. It became a requirement for Fannie Mae loans made after January 26, 2015, so if you’re getting or got a conventional loan after that date, chances are good this software tool was employed. It’s basically meant to review and score the values of both appraisers and their appraisal work. It’s not perfect, though, and some neighborhoods are really taking hard hits because of the way it pulls comparables.
Although Fannie Mae stresses that lenders shouldn’t take CU at its word and instead use it as a tool as part of a human review, some lenders still aren’t using it properly and are causing problems for both home sellers and buyers. Undoubtedly there are false highs resulting from these practices, but the false lows are what we’re hearing about because no one complains when their home is appraised for way more than it should be.
Responding to Low Appraisals
When you’re at the end of your real estate journey and you’re just awaiting the appraisal, it seems like you’re basically just waiting for the loose ends to get tied up — unfortunately that’s no longer the reality of things. Sometimes the appraisal is going to come back low. You’re left with a few options when that happens. Let’s walk through them:
Negotiate a lower sales price. A low appraisal, even a falsely low appraisal, can actually work out on your side sometimes. It can mean you’re able to negotiate a lower sales price with the seller, since your contract almost certainly has a clause in it that says you’re not bound to close if the appraisal is less than the sales price. If you’ve not gotten that far, make sure it does — many real estate offices have that language already pre-printed in their standard contracts. If you’re getting a bank loan, it’s probably a requirement of your loan, so either way you’ve got to get the appraisal price and the contract price to match or the contract is dead in the water anyway.
Sometimes your seller will be able to come down to match the appraisal, sometimes they won’t. There are still lots of houses that are underwater, so don’t be shocked if your seller stays firm on their sales price despite evidence to the contrary. They may simply not have any more room to move. This is what happened to my friend. The seller dropped as much as they could, but they couldn’t budge enough and my friend didn’t have quite enough cash to make up the difference. It was a bummer all around.
Find more money. If this is the house for you and if your contract doesn’t stipulate that the house has to appraise out and if you’re ok with the appraisal being a little on the low side because you intend to stay in that house for a while (at which point the market could literally do anything, so that appraisal will be irrelevant), then you might just want to find the cash to make up the difference between your loan and the value of the home. Tap a 401(k), ask a family member about gift money, cash out CDs, do what you gotta do. Just make sure that whatever you do, it can be tracked so your bank doesn’t have to tell you that those funds are ineligible to use for purchase. The Patriot Act is still a thing and it still makes home purchase transactions tricky.
Walk away. Appraisals aren’t an end all, be all, but sometimes they are a very convenient out if you’ve been having doubts about the property you chose. Maybe you feel like you made that decision too hastily or you later saw a house you thought would better suit your family — a low appraisal is like a magic reset button. You can simply walk away from that house now. You’ll be out your inspection and appraisal fees, but you’ll get to get on with another property without having to figure out how to make the house you chose incorrectly work. It’s not a perfect system, things don’t always work out. Maybe it wasn’t even the wrong house, but just the wrong time. This could be an opportunity in disguise.
Fight. This is what you really read this article for, isn’t it? It’s the creamy filling in the center that you’ve been bothering with this stale donut of an article for… advice on how to fight an appraisal that you know in your heart of hearts is clearly unfair. First of all, I mean, really, listen to this carefully because I’m not going to repeat myself over and over in the comments section: chances are very low that you’re going to win. But that doesn’t mean it’s not worth fighting. It’s always worth fighting for something that means anything to you. Better to go down in flames and all of that. Here’s how to do that:
- Get your Realtor involved. You’re going to need high quality comparables from the last year to prove that the home you’re considering is worth what you think it’s worth. Different areas limit neighborhoods differently, here we used to do it by elementary school. However your area does comps, go for it. You’re looking for homes that have completely closed, so if the house next door is for sale for more than yours is under contract for, that doesn’t matter — this is why your Realtor is handy. They can get into the MLS database and generally have more access to more information than you will through Realtor.com.
- Present your findings to your banker. Have your agent give a call as well, it won’t hurt. If they want them to email over their comps, that’ll work, too. The better those comps, the better your chances of getting an appraisal reviewed or overturned. Don’t do this in a passionate blur, be eloquent, be calm, be confident that your data will prove your case without your ever needing to raise your voice. The quieter you roar, the more clearly you’re going to be heard, you know what I mean?
- Hire a different appraiser. You can actually get a second opinion. Most people don’t because of the expense involved and the slim chance that it’ll matter in the long run. But you can try it — some banks may consider a new appraisal from an outside appraiser. Before you contract them yourself, though, request your bank do this for you. This way your new appraiser will be on the bank’s approved list and you won’t run into red tape or a rejection because your appraiser happened to be black listed. You may also ask the seller to split the cost of this, since it could potentially save the deal for both of you.
Low appraisals happen. But now you know that you can do a thing or two about them. I wish you all the best of luck with yours.
The Bottom Line: Appraisals are Still Just an Educated Guess
The thing with appraisals is that they’re still just an educated guess on a good day. I mean, that’s the weird thing about housing. There are no two houses that are identical, even in a subdivision of identical houses. Each lot has different views, different pluses and minuses, different angles that the sun hits them at noon. There are no two pieces of real estate on Earth that are the same. That’s what makes real estate equally maddening and intriguing.
Your appraisal is based on your appraiser’s opinion of which homes are the most similar to yours. Sometimes, that’s a really tricky call — or it’s really hard to even find a house remotely close to start with. So, you know, go in armed. Know your rights. Be prepared. Ask your Realtor for comparables in the neighborhood before you ever make an offer. There are things you can do to feel more confident that your appraisal will work out for the best.