Why do low appraisals happen, and can it happen to you?

Yes it can happen to you. Two things are certain; first, it seems like a common occurrence, and secondly, it could be one of the most expensive experiences anyone could encounter. Imagine if an appraisal for an average $400,000 was valued 5% too low. That would mean that $20,000 of equity would just vanish for the owner. Just like that. Imagine if it were 10% too low. I analyzed one which was over 30% too low. Luckily, the borrower was able to discover this and fix it before her refinance was finalized.

The National Association of REALTORS® (NAR) stated in its monthly REALTOR® Confidence Index Survey, that for sales up to August of 2018, 43% of the respondents faced appraisal issues which affected buyers or sellers.

Here is a list of important factors which every appraisal should pay particular attention to in the sales comparison analysis. Significant differences should be identified and have value adjustments. If no adjustments are noted, it is customary to enter a zero in the grid, with an explanation supplied to explain why an adjustment was not entered.

Key factors to look for.

1) Lot size (Look for large variances, such as a 40% or more size differences). Square footage of the interior living areas (being within 100 square feet of the appraised property is preferred)

2) Age (assuming condition and style are similar; age may be an important consideration)

3) Style (ranch properties do not compare in market appeal to two story properties)

4) Amenities (remodeling, finished basement, number of bedrooms, etc.)

5) Condition of the comps (comparable properties). Have they been  upgraded or remodeled recently?

6) Where on the block each comp is located. Are any backing to a park, or a street with heavy traffic?

7) When the comp was sold. Comps for properties sold in the past 90 days are preferred, but no more than six months, if possible. If a property is unique, limited market data may require that research exceeds six months.

8) Whether the comps are in the same school district. (School districts can greatly influence sale prices of some homes) When all of the major differences are recognized and adjusted in the sales comparison grid, then the final appraised value of each comp should be adjusted to a new value, which should all be somewhat similar to each other.

If there are “swing differences” of, say $40,000 or more (this is not uncommon for mid range homes), who is to say that the appraisal is not off by that amount? Who is to say that the appraised value should be the lower swing value – or the higher one? If a $40,000 difference is not accounted for in the analysis, that could be the cause of a very expensive mistake for the homeowner. In short – everything in the sales comparison grid should be logical and it should be supported and explained completely. It should be credible and able to withstand scrutiny from, for example, an experienced appraiser such as myself.

The next steps to follow.

If everything appears acceptable up to this point, we can probably assume that the data is correct and is well supported. But what if the data was not the best data that was available? Perhaps there were properties that would have made better comps to use in the appraisal. This will take some detailed research, so it may be better to
consult with another appraiser about this issue. However, if you want to pursue it yourself, here are some points to be aware of. Look for newer comps. Your appraiser should have used comps for properties sold in the past 90 days. However, some sales are not recorded as being closed sales right away. It is possible that some under contract sales were actually sold, but had not been indicated as that at the time the appraisal was prepared. Make sure the sold date is not after the “effective date” of the appraisal. Sales that occurred after the effective date of the appraisal would not have existed at the time of the appraisal and therefore would not have been considered for use in the appraisal. If there are relevant sales after the effective date, they can still be used in an appraisal, but an appraisal update, or an entire new appraisal, would likely need to be performed.

If there are large variances in the adjusted value of the comps, there may be valid reasons for that. If you can look beyond the raw market data, there may be situations which “skewed” the sale price, which the appraiser did not know about. Examples of this are a low sale that was sold below market for personal reasons, such as a job offer which required the family to move quickly. On the other hand, a sale may have sold for more that the market for reasons such as the couple specifically wanted a particular home because it was very close to where they worked, or family members. Another reason is selling below market value is because someone wanted to downsize and they were willing to sell at a discount for a faster sale. The market does not always appear to be logical, but there are always reasons that explain what happens in the market. Finding them could alter the appraised value.

Another common reason for a low appraisal is that the appraiser might not have been able to find truly comparable properties to the subject and erred on the side of caution. This is quite common. Appraisers are typically cautious. Some appraisers will use the best comps they can find, and shrug their shoulders, saying that this was the best they could do. An excellent appraiser will dig deeper. There are two techniques which can be used to supply good data for an otherwise “weak” appraisal. One is to go back in time further than the preferred six months, and the other is to go outside the market area to find comps. Many appraisers are afraid to do this because it can result in a shaky appraisal in their opinion. There are no hard and fast rules in appraising. An appraiser is required to have adequate knowledge and experience to complete an appraisal
competently and credibly, even if they might have to “bend” the guidelines slightly.

There may be more to do.

This information has barely scratched the surface of what issues someone might encounter that could result in a low appraisal valuation of their property. There is one more scenario however. It could happen that the appraisal is actually correct and has indeed been well prepared. The homeowner might be the one that does not understand the market in detail. How can you know if that is the case? Find a guide that will spell out how to look for major problems in an appraisal. Well, this one is a good start. Secondly, it may require having another appraisal completed. This will, of course, take more time and money. However, if the new appraisal outcome is significantly different, it could turn out to be one of the best decisions ever made.

Don’t take chances and end up with another appraiser that could make the same mistakes which have been made in the first appraisal (assuming that there were mistakes). That could easily happen. Find the best appraiser you can. An excellent appraiser will have extensive experience in your market area, and be able to provide you with quality advice that will tell you what a good appraisal includes, and why. As Albert Einstein said; “If you can’t explain it simply, you don’t understand it well enough.” If you have doubts or issues about anything concerning an appraisal, I am available to answer any questions that you may have.

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