Really really really low appraisal

Buying & Selling Real Estate
5yFollow

Really really really low appraisal

Lance Dutson
Member since 2021 · 2 posts · 2 votes

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!

2Reply
53 views

Most Popular Reply

Patrick Britton
Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes
5y

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.

2Reply
See this reply in the discussion

9 Replies

Jump to latestLatest
  • Filipe Pereira
    Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    Your agent should have provided comps to the appraiser, did they? Or any statistical data showing the things you are mentioning? Your agent should have a good idea of the value of the property and can help get the appraisal to arrive to that number.

    Is seller financing an option here? 

    Or how about paying for a new appraisal? I know it sucks, but some appraisers really are just that bad. Good luck @Lance Dutson. Let us know how it works out. 

    1Reply
  • David Lichten
    Lender · ME · Member since 2019 · 20 posts · 13 votes
    5y

    Hi Lance, have you thought about alternative finance options to use to close the purchase and shop around for financing after closing?

    1Reply
  • Bethany TuronPro Member
    Property Manager · Durham, ME · Member since 2019 · 179 posts · 102 votes
    5y

    @Lance Dutson This is a common issue in Maine if you are using an out of state bank for financing. They will not know which appraisers to use that know how to appraise in the unique Maine market. Who were you using for your financing?

    2Reply
  • Patrick Britton
    Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes
    5y

    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.

    2Reply
  • Brett A BrockwayPro Member
    Rental Property Investor · Waterville Maine · Member since 2018 · 39 posts · 11 votes
    5y

    Hey Lance,

    You may need to bite the bullet and move to a new bank. (I'm super stoked for you to have found a place on a lake for 350k.. I haven't seen anything selling for under 600k in a while).  I've bought 8 or 9 homes in Maine finding that some banks are conservative and are working with appraisers that come in exactly where you need them while others will try to get as close to today's resale as possible. My friends have told me that first national (https://www.thefirst.com/) comes in very close to resale value of the asset.

    If you are extremely confident in the value and don't want to miss out on prepping the property I would grab some hard money and pay the camp off with a refi from a local lender.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    5y

    Switch lenders. Problem solved.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    1Reply
  • Eileen McCue
    Rental Property Investor · ME · Member since 2018 · 26 posts · 15 votes
    5y

    @Lance Dutson We are in the northern midcoast area in Maine and had an issue with an appraisal coming back low recently, too.  Ours was on a mixed use property with few good comps (small rural markets and unique properties are tough) and an appraiser coming from a very different market (southern Maine).  The appraiser did use comps from our market, but pulled properties from 3 and 4 years ago, adjusting those sales prices for market appreciation over that time. Still seems like he could have found better comps.  Luckily for us the number came back high enough for us to make it work, it was only about $40K low.  We already are almost $4K in for this appraisal (it is a bit pricier partly because it is a mixed use building, but I think appraisers are charging a lot more these days since the market is exploding and there is more work than appraisers to do it) so we don't want to fork out another few thousand dollars. Ultimately we are confident that the value is there and we will be holding this property long-term, so we are also confident that it will appreciate over time.

    We did reach out to our lender who spoke with the appraiser, but the appraiser did not seem willing to make any adjustments.  We did not push on it since we can make it work and also did not have great comps in our back pockets either.

    In your situation with such a vast valuation disparity and comps to back up your number, it might be worth going back to the bank and having them reach out to the appraiser, or asking the bank if it is ok for you to contact the appraiser directly with a cordial letter making your argument and asking them to consider the comps that you have found.  Rookie Podcast #25 with appraiser Josiah Smelser might be worth a listen, he talks specifically about disputing appraisals: https://www.biggerpockets.com/...

    It also may be worth the cost to get another appraisal, especially since the difference you are talking about is over $100K.  Looking at the bigger picture the cost of another appraisal would pay for itself.  I am not sure how the lender would handle it (throw out the first appraisal? average the two?) so it may be worth reaching out to them as well to discuss options.

    Good luck, Eileen

    @Lance Dutson

    1Reply
  • Harrison Smith
    Real Estate Agent · Biddeford, ME · Member since 2017 · 213 posts · 150 votes
    5y

    We are starting to see more appraisals come in low than ever before. It seems that appraisers are either getting outrun by the market and can't keep up or are being asked to help keep things in check and not let values run away. A number of banks will work with you on this and some will find other ways to manage through it. If you are using a local bank or credit union, you will have a better chance of working through this than with larger regional or national banks. It is times like these that you will see the strong lenders problem solve with you while the pencil whipping lenders will throw up walls and destroy the deal.

    If you have an agent, they should be able to provide comps and their analysis of the value as something the bank can reference. I have gotten banks to treat appraisals as "informational only" if I could prove the discrepancies should have been obvious to the appraiser. Maine can be a tricky market because it has so many niche submarkets to it, but a good agent and lender can get you through that.

    Best of luck working through it!

    0Reply
  • Lance Dutson
    OP
    Member since 2021 · 2 posts · 2 votes
    5y

    Thanks to everyone for the advice, all of this is super helpful. We're waiting on word back from appealing the appraisal and will update the thread with the outcome. Really appreciate all the great advice.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free