Pricing and Appraisal, Part II
(How To Overcome A Low Appraisal)
  By Albert Joy

Given the previous example, there was a loan that needed approval and the appraised value came in at $4,850 less than the contract’s purchase price. There are a number of ways that the broker and/or owner can deal with the discrepancy.

Step 1: Challenge the existing appraisal.
It is helpful if the broker is present at the appraisal, prepared with evidence of the highest comparable sales in the area. The best source is pulling information by both MLS system and by all properties. Searches based on property will include transfers between family members, trusts and "for sale by owners", transactions not normally covered by the Realtors’ MLS. Every sale may count.

Appraisers use the same sources to obtain their information, but can often miss vital data or will base their determination on old or dissimilar sales. If one sale can raise the valuation even $1,000, it is useful. That is $1,000 less to negotiate between buyers and sellers.

The best approach is for your listing agent to be at the appraisal, prepared with recent sales comps and to remain cooperative with the appraiser.

As listing agent, I usually won’t hear about the appraisal unless a problem exists with loan approval. If an appraisal appears that it will be lower than required by the loan application, the appraiser will usually call the listing agent in advance for additional supporting information. At that point, the approach to take would be to go over the appraisal with the appraiser and to question each comparable and each allowed value used to make the determination.

Once the appraisal is in writing, it is much more difficult to change the figures, but possible. The appraisal is a reflection of the appraiser’s opinion of what the property is worth—once it is in writing, it has his personal "stamp". If you know the appraisal is going to be critical—Your borrower qualifies by the skin of their teeth, make sure your agent shows up at the appraisal armed with the best comparable sales he can find.

Step 2: Pay the shortfall.
If you are unable to contest the full shortage of the appraisal report, the buyer can pay the shortfall between the appraisal and the contract’s purchase price in cash. However, be aware that the buyer may be required to provide the money from their own funds--especially if a portion of the down payment pledged is already by gift. Most buyers are already strapped with little cash reserves, and even if they have the money, may be unwilling to pay more than appraisal.

Step 3: Reduce the purchase price.
The seller can reduce the contract’s purchase price to match the appraisal amount. Again, if everything was done to "save" the existing contract and terms, the Seller will always have to deal with the problem of low comparables in the area. Reducing price allows the transaction to complete, allows the Seller to move on with their plans, especially if their move has a definite time frame, such as a job relocation or retirement.

Step 4: If you’re really stubborn...
Of course, if there is supporting data available that the appraiser refuses to use, there is always a chance you can require the lender to get another appraisal, or switch lenders altogether, and have a new appraisal performed. This method is not for the faint of heart. With the added time required for re-processing, the Buyer may suddenly get a strong case of remorse. There also may be added fees for loan application and processing.

CONCLUSION:
Although we don’t have control over every aspect of a transaction, understanding the problems and their solutions allows us to make clear choices about what our options are, and allows us to make smart decisions about real estate.