Appraisal Challenges

September 17th, 2013

In my experience, there seems to be a lot of confusion about appraisals. I hear a lot of misstatement about how appraisal values are determined. If an appraisal comes in below the agreed upon sales price there is usually a lot of push back, anger, and harshly worded statements about the intelligence of the appraiser. Many sellers, some buyers, and even some realtors use methodology and data that is not accurate. The reality is that there is a way to challenge an appraisal that is quite simple. All you have to do is come up with recent comparable sales (aka comps) that you think are better than the ones that the appraiser used. The problem is what some people come up with for comparable sales are not really viable comps.

  • I have seen people cite comps that are over a year old, which is too old.
  • I have seen people cite comps that are not even comparable. For example, citing a close-by neighbor that recently sold their house for a certain price, and then finding out that the neighbor’s home is a 2,600 square feet, colonial home, with a 2 car garage, on a 1 acre lot, while the subject property is a 1,800 square foot, split level, with no garage on a ¼ acre lot!
  • I have seen people try and use comps from very different housing stock, like using a colonial home as a comp for a contemporary home. It’s best to use similar housing stock when looking for comps.
  • I had a transaction recently where I thought I saw the potential for the value to come in low. I asked the realtors and the seller to provide me comps in anticipation of a problem. They sent me, within 2 minutes, over a dozen comps. As I reviewed them, I saw that they were all listings, clearly they were thinking hastily. A listing is not a settled sale, and therefore, it is not acceptable data for an appraisal. An asking price does not equate with a selling price. I then asked for comps that were actually settled sales. Within a few minutes more, I got another dozen comps. Every single one of them was anywhere from 50% to 100% larger than the subject property, none of them was a comparable size. The reality is that the comps I found on my own were very similar and a lower value than the other parties were expecting, and the comps the realtor and seller found were only found to support a certain desired value they were thinking. Clearly our human internal biases are very strong. For more on how bias impacts our opinion of real estate value click this link. We did end up having appraisal problems on the above referenced loan, and the realtor and seller then made comments about their superior view, new air conditioning, and new in-wall stereo speakers throughout the house, and that the appraiser did not take those into account enough on the appraisal.

However, the best way to challenge an appraisal is with the most similar homes to the subject property, that are recently settled. Trying to alter the adjustments an appraiser makes on an existing appraisal would provide marginal, if any, yield. This is mostly due to the fact that appraisers and the “rule makers,” such as Fannie Mae, as well as the marketplace, do not value things dollar for dollar, and do not monetarily value things the way an owner does. Trying to value the view from your home is very subjective.

My comments to all parties were:

-It’s hard to monetize a view from a home, and although there may be some extra value in that, most of the value in a home comes from the basic building blocks of a home: square footage, bedrooms, bathrooms, parking, and to some degree, the level of finish.

-Replacing A/C is a maintenance item, not a value adder. For example, if you need a new roof you have to go replace it, this is standard maintenance when owning a home. You can’t expect more value for a house because you replaced a roof. If you are comparing two homes and they are 100% identical (which is almost never the case) and one has a brand new roof and another has a 30 year old roof, the new roof home will be worth a bit more, but it’s not a “dollar for dollar” gain. A $10,000 roof will not get you $10,000 in value.

-An in-wall stereo speaker system is not a fundamental component to a house, and adds little or likely no value.

What will win an appraisal challenge are better comps, if they exist. If a realtor can show a lender better comps, then the loan officer can write up a summary of some of the more important points of error, and why the comps being provided are believed to be superior to the data the appraiser used, and then send it all in for an “appraisal challenge” and ask for reconsideration.

Who considers an appraisal challenge is the appraisal management company who hired the appraiser, along with input by the underwriter, and the appraiser as well. If you have an appraisal you believe to be below the market value, do not despair, analyze a copy of the appraisal, determine if there are better comps, and attempt an appraisal challenge!

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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