For home sales contingent on financing, the appraisal has the potential to derail the entire sale — or validate the price, cinching mortgage approval.
When an appraisal comes in below the price the buyer and seller agree to, this is known as a low appraisal. The mortgage lender will not approve a mortgage amount above the appraisal amount (including the buyer’s down payment). The only options to go forward with the sale are to:
- decrease the agree-to price to match the appraised value;
- cover the amount between the appraised value and agreed-to price with additional money from the homebuyer; or
- rebut the appraisal.
However, rebutting the appraisal is not a guarantee. In fact, rebuttal letters will only work when there are details missing or wrong in the appraisal report.
Beyond the obvious mistakes like incorrect square footage or missing features, what other factors can agents point to when attempting to rebut an appraisal?
Common deficiencies
The Bureau of Real Estate Appraisers (BREA) outlines the five most common appraisal deficiencies in their spring-summer 2020 newsletter. These deficiencies are not flat-out errors or mistakes — which are easier to spot — but they are instances where the appraiser is out of their depth or has completed insufficient work to turn in a thorough appraisal report.
- Appraisers following an atypical assignment break the Uniform Standards of Professional Appraisal Practice’s (USPAP’s) Competency Rule. This applies when the appraiser does not have the personal knowledge or experience necessary to complete the assignment (for example, when the assignment is categorized as complex). When applicable, the appraiser needs to disclose their lack of knowledge and experience to the client before accepting the assignment. Even when disclosed, the appraised value may not match up with the value an appraiser more experienced in the type of subject property would have assigned.
- Often, appraisers will come across a unique property attribute and are unable to find any comparable sales with the same attribute. Therefore, they assign the attribute a zero-dollar value, but that is not correct (unless they are asserting the attribute has a literal zero-dollar impact on the property). Instead, the appraiser needs to use an appraisal approach other than the comparison method to evaluate the unique attribute.
- The BREA claims a whopping 20% of appraisal reports that pass through their office cite incorrect zoning designations. This doesn’t always impact the appraised value but can have disastrous consequences for the valuation when it does. The BREA suggests going directly to the local government agency for the property’s zoning designation, as public records data providers are not always correct.
- Use of the reconciliation to make up for unique attributes or for sloppy analysis is not correct. And yet, it remains a common practice in appraisal reports. Weak sales data and amorphous multiple listing service (MLS) comments about the property’s condition are common occurrences. To make up for this, instead of rounding up or down to suit the sale’s needs, the BREA suggests the appraiser use the reconciliation to express their opinion of the home’s value within each separate cost approach used.
- Perhaps the sloppiest deficiency is a wide range of values. For example, an appraiser who says the property is valued between $500,000 and $1 million (a real example offered by the BREA) is flat-out useless. Wide value ranges usually mean a data or methodology error is present.
When an error or appraisal deficiency is identified, the buyer and their agent may draft a rebuttal letter to the lender. A rebuttal letter with the highest chance for success:
- is written by the buyer with the help of an experienced agent;
- focuses on hard facts rather than emotions;
- identifies the errors or deficiencies explicitly;
- includes professional opinions and recent comparable sales to rebut the previous appraisal; and
- is sent to all parties to the transaction.
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