Really really really low appraisal

[Lance Dutson]

Hi all - First post here, but wanted to thank everyone for all the great advice in these forums.

I'm looking at purchasing a lakefront property in rural Maine. We've worked through the process for months and now, about 10 days before closing, the appraisal has come back more than 100k less than the sales price. ($350k sales price, $241k appraisal value)
The market is very hard to judge, because of a total lack of comparable sales in the same town. This is a property about 6 miles from a major ski resort area, and the pandemic has driven sales in tourism areas of Maine through the roof. Example: median sales prices for properties in Maine were up 15% last year, in the county we're looking to buy, they're up 31%.

The appraisal used comps roughly 40 miles away, outside of the mountain/tourism area, closer to some fairly depressed, more densely populated areas. The homes were also waterfront and shared some similarities, but they just were not at all similar in market to where we're looking to buy. There is a similarly tourism-focused area to the west of the subject property (and closer), and we were able to find a significant number of comps there that justify the sales price of this existing property. We have submitted these new comps, and an overview of the reasons we think the other comps were poorly chosen, in an appeal to the bank, and are waiting to hear back.

Normally such a low appraisal would give us pause about our offer on the property. But we've been researching similar properties for years, and felt very solid on this one. The property was actually not on the market, we convinced a reticent seller to sell to us, and have felt we were lucky to grab this one at the beginning of a significant market increase.

I wanted to share this and see if folks had thoughts they'd be willing to share. I'm very pessimistic about our prospects because of the massive discrepancy, if it were 10% or so I could see an appeal working, but $110k is a pretty major mountain to climb through an appeal process. We also found a number of factual errors in the appraisal -- wrong number of bedrooms, wrong number of fireplaces, a stand-alone workshop that was missed altogether, etc. So we believe this was just a totally botched appraisal, but we're new to this and might be thinking with our feelings rather than our logic here. 

Any input or strategies would be much appreciated!

[Patrick Britton]

I'll start by pretending to defend the appraiser.

Appraisers are educated and trained to arrive at an opinion of value following certain guidelines. Especially with properties where there aren't very many comparable sales, this results in an opinion of value that is substantially different from the list price, offer price and whatever everybody else thinks fair market should be.

But when it comes to trusting the opinion of value, a lender is always going to select someone who has +200 hours of education and +1500 hours of actual relevant work experience over any real estate agent, no matter that real estate agent's experience.  And to appraise a property like the one you're describing would require someone of substantial appraisal experience.  At least, it should.  So with all due respect to any agents out there, and I used to be one for a number of years, I would trust an appraiser before an agent 9 times out of 10.  That still leaves a lot of room though...

It seems like the appraiser is valuing things rather differently from you but I would double check a couple of things just to make sure you're on the right side of the argument before screaming and shouting like a banshee :)

For instance, I have to assume that lakefront property might have a septic or well? If that is the case, how many rooms is the septic permitted to service? If the septic system is permitted for two bedrooms, even if the house has 50 bedrooms, the appraiser can only count the two rooms that have been permitted.

Similarly, lakefront property is especially difficult to value since the paired analysis required to ascertain the value add of being on lakefront requires enough comparables to arrive at a reasonable adjustment. If there are not enough comparable properties it's not surprising to see such a significant difference between appraised value and “market.”

Also, appraisers are really not supposed to use comparable properties 40 miles away unless they have no other choice. Unfortunately, this is a risk that all rural properties will face.

While the following argument has never worked for me personally, and I have used it at least a half dozen times, within the appraisal report should be the appraiser's business address. How distant is it from the subject property and how long does it take to drive there? It is reasonable to assume that most appraisers operate within a 30 to 45 minute drive of their office. in Maine, it's probably a little bit longer but it's worth checking. After all, an appraiser who lives four hours away and has never been to your neck of the woods might not have a clue what's going on there.  but while it makes a lot of sense, this argument has failed me thus far. But perhaps it's worth a shot...

The significant increase in prices (over 30%) is considered extreme by most measurements and cannot be expected to continue. I would hope that there was some adjustment made for the rapid rise in appreciation so I would have a very careful look of the appraisal itself and look for such an adjustment. If you can prove that prices have increased to that extent and show that the appraiser neglected to include that valuable information, then you have substantial ammunition to have a revision made. Just bear in mind that most appeals don't move the value more than 5%.

Considering the difference and what is at risk I would look at the appraisal, see if there's any way you can get a review done and see what happens after that. But at the end of the day, appraisals are only about $500 or so which in the grand scheme of things is statistically insignificant compared to the purchase and holding costs and all the other costs associated with real estate.

Presumably there's nothing you can do about it right now, but next time you submit an offer on a property make sure there's a seller concession to pay for the appraisal if the appraisal comes in below a certain value.