Appraisals coming in low are part of the market that we are in. Nonetheless, it is still thoroughly frustrating for all parties involved each and every time an appraisal comes in low. Unless of course you are the buyer and the seller happens to be a bank or short sale lender. Then you may be jumping for joy because you will most likely get a better price on the house.
Just last week on my FHA purchases, the appraisal came in $12,000 less than the sales price. The owner/agent seller of the home (and new property flipper I should add) called screaming and yelling that it was a bad appraisal and that if the appraiser would have used his comps, the value would have come in perfectly fine. After reviewing the comps that the listing agent provided, I noticed that they were the exact same comps that the appraiser used in his report. The agent had the appraisal for an entire week, yet they had not even read it. I explained to him that an appraisal cannot be disputed just on the grounds that you do not like it or that you do not agree with it but that actual data would have to be provided.
Appraisals are done to protect the buyers! They also protect the lenders. The appraisal business is heavily regulated by the government, FHA, VA, Fannie, Freddie, the banks loaning the money. The AMC appraisal management companies also have guidelines that must be followed.
When an appraisal comes in low, it should first be read thoroughly. The most important part of any appraisal is the 1004 MC Form. This form came out in April 2009 and is in all appraisals. It shows exactly what is happening in the specific market area. It demonstrates the market trend for last year in the specific market area. It also shows the median sales price for the last 3 months.
The Sales Addendum will summarize and help explain the information on the 1004 MC Form.
The Active Listings and Pending Sales have to be used in the appraisal because they demonstrate what the future market holds.
Per the appraiser’s guidelines, foreclosure sales and short sales have to be included as comps if they are part of the market area. I hear the argument all the time that, “Our house is so much nicer and should not be compared to all of these foreclosures…” The appraisers are REQUIRED to include the foreclosures and short sales as comps. Explaining to your sellers during your listing appointment with them that foreclosures and short sales are part of their immediate market area and therefore they will be used as comps by the appraisers may prepare them for any value surprises later on in the transaction.
Keep in mind that on SOME Fannie and Freddie homes, they have actually started installing new appliances, carpet, and paint in their homes. Many of these foreclosures are actually in better condition that many of the re-sales out there!
Another popular argument is “My home has a $50,000 front door straight off of King Tut’s Tomb and did you not see the gold plated ceilings! There is no other home in the neighborhood with these types of upgrades and therefore my home should be worth way more than all the others.” Extremely nice as they may be, there still has to be homes to COMPARE them with. Contrary to popular belief, if you have the most highly upgraded home in the neighborhood, chances are that you are not going to get that money back out of the home. Appraisers are limited to 10% line item adjustments for upgrades. Other comparable homes have to have similar upgrades for the subject to receive value for them.
Typically the total adjustments for comps cannot exceed 25% of the subject’s sales price.
Also, the comps that are used in the appraisals have to have a gross living area within 20% of the subject’s. That castle in the next neighborhood over cannot be paired down to the size of your heavily upgraded studio condo and used as a comparable.
After thoroughly reading the appraisal and reviewing the 1004 MC Form, if you still feel the value is incorrect, and the appraiser has made an error or has not used the best comparable sales that are available, you may provide the comparables that you feel should have been used as long as they have closed within the last 60 days and are within the subject’s immediate subdivision. Pay special attention to the 1004 MC Form. If it is checked as declining over the past twelve months and if the last 3 month median price in the neighborhood is $150,000 and your home is priced at $250,000, it could be a challenge to dispute, and underwriting will probably decline the loan due to unsupported value. Keep in mind that underwriting always has the final say.
