Lower appraisal can impact loan, sale

Many buyers and sellers are finding out that in today's down market, houses aren't worth what they thought they were. At least not in the eyes of appraisers, the professionals hired to tell lenders what the places could sell for on the open market if borrowers failed to make their payments.

In a perfect world, the value of a property is what a ready, willing and able buyer will pay for it. But the housing market is imperfect at best. For one thing, values rise and fall with the tides -- maybe not on a daily basis but over a period of several months. And in the appraisal world, valuations are based on previous sales, so appraisers are always a step or two behind the market -- going up and going down.

Moreover, the art of appraising is just that -- an art, not an exact science. And even though those who practice it hold the fate of sellers, buyers and refinancers in their hands, they are not gods. Indeed, they are fallible, just like everyone else.

That's important to keep in mind, especially in today's world of housing finance, where more and more lenders are turning to third-party appraisal-management companies to hand out assignments instead of hiring appraisers directly, or allowing loan brokers from ordering appraisals directly.

The idea is to protect appraisers from pressure to inflate their valuations. That's the theory, anyway, and it may indeed stop any schemes to compel appraisers to bump up their findings. But at the same time, many sellers contend that the use of such middlemen has caused all sorts of problems.

With that in mind, here's how to appeal your appraisal if you honestly believe it is too low.

Start by finding out whether yours is a full-blown appraisal or an electronic one. More lenders are using automated valuations, particularly in the home-equity sector, to speed up the process and cut costs. But they are notoriously inaccurate.

Automated valuation models are good enough to give lenders a 30,000-foot view of local housing values. But they just won't do on a house-by-house basis. Neither will so-called drive-by appraisals in which the appraiser never leaves his car to actually go inside. Rather, he simply drives by the place to make sure that it is really there.

If your lender is relying on an AVM or a drive-by, ask to have your place valued by a human being who actually looks at your specific house, compares it to others in the neighborhood, checks out the community, and does all the things an appraiser is supposed to do. In most cases, lenders will agree, especially if you are willing to write the check to cover the several hundred dollars that a full appraisal will cost.

If a real, live appraiser is responsible for a valuation you think has come in too low, your appeal becomes a little more problematic -- if only because you are dealing with human beings who have feelings. So to keep your appeal from becoming an exercise in futility, do it with as much finesse as possible.

Of course, you can always ask for a second opinion from another appraiser. But you'll have to pay the freight a second time, too. Moreover, to stand any chance of winning your point, the second valuation must be more than 5 percent higher than the first. In the appraisal game, anything less is considered an acceptable difference.

Besides, even if the second appraisal is far above the first, it's the lender, not you, who gets to pick the appraisal on which the loan is based.

While this may seem as if the cards are stacked, you can even the playing field by suggesting, firmly but nicely, that the appraiser assigned by the lender erred and requesting -- again, nicely -- that he or she be asked to take a second look. And you can do some of the appraisal work on your own. It may take time and effort, but it could pay off in the long run.

Your job is to search out comparables that the appraiser may have missed the first time around. A comparable is a property of the same size and style in the same location and with the same features as the one being appraised. To determine a fair-market value for the subject property, an appraiser looks for recent sales of several comparable properties.

Normally, they limit their search for comps to the multiple-listing service operated by the local real-estate association. And when they do that, they may not be looking at the entire market.

Even though enough sales pass through the typical MLS that an appraiser should have little trouble finding comparables, not every deal goes through the system. Independent brokers who are not MLS members make many of them, and some are made without the help of an agent, MLS member or not. Then, too, some MLS members don't put all their listings into the system.

As a result, in some major markets as many as half of all transactions occur outside the MLS. Your job is to find them. And to do that, you'll have to comb the land records at the local courthouse.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines d housing and housing-finance-industry publications.