My Appraisal Was Low-Balled: Now What?

What to do when an appraiser’s opinion of value for a home is lower than the purchase price.

Appraisals are a necessary evil when it comes to buying or selling a home, since the value provided by the appraiser is what the lender will use as a basis for deciding how much money the buyer will be able to borrow for the purchase of a home. The appraiser is working for the bank in an effort to protect the bank from financing a property for more than its market value, and is not working for the buyer or the real estate agent.

So what happens if the appraisal comes in low? Do you back out of the deal, or is there the possibility that the value indicated on the appraisal is 100% wrong?

First of all, an appraisal is an opinion of value that is supposed to be supported by facts. The appraiser should pull “comps”, or comparable sales data, from similar homes in the area that are either currently for sale or that have closed escrow recently, as the basis for the appraisal report. The appraiser’s knowledge of the area comes into play here, since you cannot accurately comp a home in North Valencia with a home in Northbridge Pointe even though they’re in the same zip code. Santa Clarita homes are typically tract homes organized into specific development areas, so it’s best to start ultra-local and expand out from there when looking for comps.

Standard guidelines allow for a range of size (interior square footage), age and location (proximity to the home being appraised) as part of the appraisal process. Typically the appraiser will go +/- 300sf from the size of the property being appraised and will attempt to use homes that are within the same age range as well as the same development area. For the area, the same tract is preferable, but the search can be expanded to the neighborhood and surrounding areas if necessary.

Unfortunately, this week has shown that appraisers do make mistakes, and in all appearances they may make intentional mistakes, in the data that they report. However, with a dilligent Realtor, you may be able to successfully challenge a low-ball appraisal by providing corrected data and additional (valid) comps to the appraiser via the lender that hired him.

Case #1: Bridgeport home with about 2200 square feet of living space was comped against homes that were 1600 and 1700 square feet. The appraiser bumped up the square footage of each comp home to about 2200 square feet (added 600sf and 500sf to comps, respectively), but left the price unchanged for these smaller homes, thus resulting in a much lower price per square foot. This appraiser also used a home in Plum Canyon as a comp for Valencia Bridgeport, which is almost 3 miles away, as well as a home in Valencia Northbridge with only 1300sf. With this appraisal, the appraiser used comps that are truly not valid comps, and falsified data by adding square footage that doesn’t exist.

Case #2: Canyon Country home built in 1988 in an area that has very few valid comps. The appraiser in this case decided to “create” a comp, using the address of the property being appraised (DUH!) as well as that property’s list price, and altering all other data (including adding a pool) to make this look like another home listed for sale. A search of the MLS and all other third-party websites turned up NOTHING that came close to the data on this “comp”, so it is definitely something that the appraiser created out of thin air.

In Case #1, we were able to successfully challenge the appraisal and get it modified to take into consideration the actual data instead of the modified data, which resulted in a successful close of escrow. Case #2 is just entering the battlefield, so there are no results to report on that one yet.

It is entirely possible that appraisals have included bad data for a long time now, but when they come in at a value that is at or above the home’s purchase price, there is no reason for anyone to examine or dispute the details. However, when an appraisal comes in low it affects the buyer’s ability to puchase their home of choice, so the data should be analyzed with a fine-toothed comb to either verify that the data is correct or dispute it as in the examples above.

If the lower appraisal is indeed correct, then the buyer has three options: 1.) Ask the seller to lower the purchase price to agree with the appraisal; 2.) Bring in extra money to fill in the gap between the purchase price and the appraisal price; or 3.) Walk away from the deal and find another house to buy. Since most of the homes for sale in the Santa Clarita Valley are either bank-owned (REO) or short sales, you’ll be dealing with the bank’s pocketbook instead of the sellers (homeowners) in most cases, so you won’t be affecting a family’s ability to put food on the table by reducing the price. Getting the bank to approve a reduced price may create its own challenges though, so your Realtor should be prepared to back up your request for a price reduction with an abundance of well-organized relevant data.