One of the pivotal-but least understood-parts of a real estate transaction is the appraisal. If your house doesn’t appraise for what you think it’s worth, your sale could fall through or your refinancing could come undone.
Appraisals also happen to be one of the most emotional parts of a real estate deal. Real estate appraisers say they use facts to help them determine a house’s value, but they acknowledge their decision, ultimately, is subjective. And subjective opinions on the value of one’s home-a subject near and dear to the hearts of most people-often aren’t easy to take.
“A lot of people don’t understand that real estate can go down in value as well as up,” says John Baldwin, owner of Central Florida Appraisal Services in Winter Park, Fla. “Sure, over the long term real estate will go up in value-it always has. But over the short term-one, two or three years-it can go down in value, too.”
If you get an appraisal that doesn’t meet your expectations, you have every right to challenge it and ask for a new value, appraisers say. But you had better be prepared with facts to back up your case and give the appraiser a good reason to change the result.
Be specific
“You have to come in with something specific,” Baldwin says. “You can’t just come in and argue that your house is the nicest one is the neighborhood, and therefore it should be worth more.”
Challenging an appraisal will require that you know a little about the process. Here’s how an appraisal works:
First of all, appraisals are required in every transaction that involves a mortgage lender. The appraisal is part of the “due diligence” process lenders must go through to approve loans. This means lenders have to be assured that if you do not repay your loan and they foreclose, the sale of your house will cover their loss.
In the parlance of the real estate industry, lenders often talk about whether or not an appraisal “supports the transaction.” For example, an applicant who wants to refinance a mortgage without paying fees out of pocket needs an appraisal that is high enough for the closing costs to be taken out of equity.
In most cases, mortgage companies hire the appraisers. But many homeowners-in the process of putting their houses on the market-hire appraisers, too. Prices vary from about $225 to about $300, but large, expensive houses may cost more to appraise.
Most residential appraisers go by a method called the “direct sales comparison approach.” It means they look for similar houses that have sold recently in your neighborhood, and they use prices in those cases to help determine your house’s value.
Checking the MLS
When appraisers get an assignment for a particular house, the first thing they do is check with a multiple listing service, says Ben Cole, an Orlando appraiser. They obtain a list of closed sales in your neighborhood.
The next step is to visit your property. Appraisers measure the dimensions of the house’s exterior walls, which helps them calculate the size of the living area. They note whether or not your house has a fence or any other exterior improvements. They take photographs of the front, rear and sides of the house.
Then they look inside to check on the general condition of the appliances, the flooring and the walls. They also look at the floor plan and judge whether traffic patterns in the house are smooth or awkward.
Certain intangibles also come into play. For example, how clean a house is and how sharp the landscaping looks is not supposed to have an effect, but it probably has an unconscious effect.
“We’re looking for things that materially affect the value, so it’s not particularly important that the housekeeping be perfect,” Cole says. “But on the other hand, if the housekeeping has been neglected for a long time, it could affect the value. So I would say the spiffier a house looks, the more it will appraise for.”
Many appraisers also briefly interview the homeowners and ask them to point out what they might have missed, Cole says.
“Then, once you know what the subject property is like, you can go back to your office and pick out the `comparables’ that most closely resemble the house you’re appraising,” Cole says. “You have to have at least three. The best-case scenario is to have three similarly sized houses in the same neighborhood that have all sold in the last six months. But if that’s not the case, then you start looking for the next-best examples.”
The subjective part
The next step is determining the house’s value. Here’s where the process gets subjective. Appraisers establish a value for the house based on how it compares with the other “comparables” and at what price they sold. The fact that every house is slightly different is what forces an appraiser to make a judgment.
“What we’re looking for is the market to tell us how much people are paying for houses in that neighborhood,” Cole says. “But we’re not always comparing apples to apples, and therefore we have to make adjustments.”
To challenge an appraisal, you need to obtain a copy of the appraiser’s report. If the lender ordered the appraisal, you can get a copy from your loan officer. If the lender balks at giving you a copy, make the request in writing. Lenders are required by the federal Equal Credit Opportunity Act to provide you with a copy of the appraisal within 15 days of a written request. Of course, if you ordered the appraisal, you will get a copy directly from the appraiser.
The most important thing to do is check what the appraiser uses for comparable sales, says Baldwin of Central Florida Appraisal Services. Make sure the prices and features are as closely comparable to your house as possible.
“You may have knowledge of one of the comparables that the appraiser wouldn’t have. For example, the house may have been sold in a pre-foreclosure situation, and the owner may have accepted a lower price than he would have in a normal situation. It may be a divorce situation,” Baldwin says. “That’s knowledge that an appraiser wouldn’t have that could cause him to change his mind about the value.”
Another good piece of ammunition to have when challenging an appraisal is additional comparable sales, Baldwin says. That information can be obtained from real estate agents, who have access to the multiple listing service, or from the property records office at the county courthouse. Some appraisers might be willing to consider new information from sales under contract but which haven’t closed, he says.
If you believe you have enough evidence to support a new value, call or write the appraiser, or ask your loan officer to intervene. Simple cases can be cleared up over the telephone, but more complex cases may require you to visit the appraiser’s office, Baldwin says. It’s reasonable to expect an answer within 10 working days, he says.
Asking the lender to hire another appraiser usually is not a good idea, says Ross Bennett, vice president of Market Street Mortgage in Maitland, Fla.
“There’s no guarantee that another appraiser is going to come up with a different value,” Bennett says. “And another appraiser is going to want a new fee.”
