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Managing Expectations, Opening The Box: What To Do When An Appraisal Is Low

As a real estate broker or mortgage broker, whose commissions often depend on the results of an appraisal, what should you do when that package arrives, and the appraisal is lower than needed to make the transaction work?

As the market continues to change, and many property owners in the market are still out of step, so I suspect that the idea of low appraisals will rise in occurance. Initially the inference of a low appraisal is the idea that the appraiser is simply wrong or incompetant. After all, everyone else already knows the number [Matrix] [1].

But lets assume the appraisal is actually supportable, accurate and, well, right.

What should you do? This question is answered in a new Washington Post column called House Counsel by Benny L. Kass that addresses real estate issues from a legal perspective. In Low Appraisal? How to Keep a Home Loan and Sale From Collapsing [WaPo] [2], the author says the appraiser works for the lender:

Whether the real estate market is hot or cool, home buyers and sellers can get upset when the appraiser who is examining a home on behalf of the mortgage lender sets a value below the agreed-upon sales price.

Even though the borrower pays the appraisal fee, the appraiser is really working on behalf of the lender — to determine how much a home is worth so that the bank doesn’t lend more than it should.

Here’s what I suggest (as an appraiser) and then I’ll add the article suggestions:

Assuming this goes nowhere or the appraiser (gasp) is actually right:

If the appraisal is low, then there is a low chance that the deal will fly. So what’s the long term solution?

Brokers (listing and buyer’s broker) should meet the appraiser during the inspection and be helpful providing relevant information such as data that can be verified (DON’T be a distraction on site though: I will scream the next time I am told “Here is the kitchen”).

Tell the appraiser about relevant contracts, listings, summarize the activity on the sale. If you provide information, make sure it can be verified and its not a bad idea to provide a little narrative as to why the property is worth what it sold.

I don’t want to hear that the property is fabulous.