Stumped by a Low Appraisal

November 10, 2009 at 4:30 AM 5 comments

A few days ago my husband and I were shocked by an unbelievably low appraisal on a small piece of property in North Carolina. After inquiring about the property and submitting a bid we contacted a lender to apply for a loan. The lender immediately hired an appraisal company to value the property. While I thought the seller’s price might be a bit higher than the appraisal I was shocked to find out that the vacant lot appraised for $100,000 less than our offer.

It is my understanding that appraisers search for real estate sales that follow specific guidelines. I thought appraisals were typically based on sales within a one mile radius that are less than 12 months old. This was not the case with our appraisal. The appraiser compared our lot with sales on properties that are ten miles away and over a year old.

We’re looking to purchase a waterfront property in an area with very little vacant land. Over the years the majority of lots in communities in and around our area have been built upon. Rather than looking at all land sales within a one mile radius of our home, the appraiser looked only for sales of waterfront properties. He had to go 10 miles away to find sales on vacant waterfront lots and found only three within the last year and half. He used those three properties as the comparables in his appraisal.

Of course, as anyone knows, you cannot compare lots that are over ten miles away from one another. Heck, in our neighborhood in Maryland the price of houses in our immediate community ranges between $400,000 to $850,000. If you walk down the street and into the next community, (less than half a mile away), you won’t find a home worth more than $300,000. If a few blocks can cause that much variation in price you know that it is impossible to compare properties that are over ten miles away.

So what can you do about a low appraisal? Well, in our case very little. Our lender will not accept independent appraisals, so our only option was to refute the valuation the original appraiser provided.

We provided detailed documentation to the appraiser, including a number of properties in the area that sold for $100,000 to $150,000 more than the valuation he provided. We explained that sales that are more than ten miles away and over a year old are not a reflection of the current real estate market in our community.

Of course, just as I expected the appraiser refuted each of our points and explained that the lot had to be compared to waterfront property and that none of the recent sales in our community were waterfront. Hmmm, that’s funny, because usually waterfront views increase the value of a property, yet this waterfront property is valued at nearly half of some of those lots.

Honestly, I didn’t expect the appraiser to change his valuation. His number is so off the mark that he would look like a complete goon if he went back and revised his original estimation. It turns out that the appraiser is a trainee that is from a community far away from the lot in question. Odds are that he is both unfamiliar with the appraisal process and our community.

So where does that leave us. Well, the lender certainly won’t provide us a with a loan large enough to fulfill our needs. They will provide us with only a 66% loan on the property valuation, which is quite a bit less than we require.

At this point it is fair to say that the lender will not further decrease his price. He dropped $35,000 off his asking price already, so if we wish to proceed we need to explore other financing options.

I wonder how many times an appraiser revises his valuation. Based on this experience I would imagine that it happens very infrequently.

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5 Comments Add your own

  • 1. Anonymous  |  November 10, 2009 at 2:37 PM

    I have had a problem with a low appraisal as well. My thought on this is that with the collapse of the housing boom there have been a lot of lawsuits against appraisal companies for supposedly overvaluing homes (to allow mortgage loans to go through). Later, the house value tumbled and home owners and buyers of mortgage backed securities got screwed and sued the appraisers. The appraisers are probably trying to be very conservative as a result.

    Reply
  • 2. James Ebert  |  November 10, 2009 at 3:32 PM

    Hi,
    As a 20 year appraiser, I am seeing this over and over. National lenders have the lowest rates and atractive offers, but they then use an appraisal management company, co-owned by the bank, which is making money from the appraisal as well. Explore smaller banks, local brokers and even local waterfront expert appraisers, who can help you look at other lenders, who will use a high quality expert on your valuation. Trainees often will work for 50% of normal fees, and they are totally lost in this market. James Ebert Westlake Village, CA

    Reply
  • 3. Anonymous  |  October 15, 2010 at 8:20 PM

    I know that this is an old posting, but here's my 2 cents: you were lucky the appraisal came in so low. It gives you negotiating power. If the appraisal was low for you, will it change for anybody else? Offer less and see what the sellers say. It's a buyer's market.

    Reply
  • 4. One Frugal Girl  |  October 16, 2010 at 3:39 PM

    @Anonymous – The seller wasn't willing to drop the price. The appraisal was just wrong and he wasn't about to budge to meet it.

    Reply
  • 5. Anonymous  |  April 15, 2011 at 3:23 PM

    Hi. Low appraisals are happening all across the country! In fact I just purchased a home in California and the appraisal came in 10,000 dollars lower than contract price. In most cases the banks don't want to come down in price because they already are at rock bottom pricing. I got fortunate. Our only hope was the bank dropping price to meet the appraisal and they just did a price drop of 10,000 before we got into contract. They did agree to drop another 10,000 to meet the appraisal and we were able to close the deal. They did require us to pay 1,000 more in closing costs and took away the home warentee they were going pay for in the beginning. We got very lucky because if the bank would not have dropped the price we would have lost the home sale! Low appraisals are deal killers across the country. Apprisals are comming in low because they are basing the compariables on distressed property because there are so many distressed. Propertys now sometimes its the only comp they can find. Low appraisals are killing deals EVERY where! This is hurting our econmony. Perfectly qualified buyers are not able to buy homes due to low appraisals! Hopefully this trend will end soon!

    Reply

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