The Appraiser Undervalued My Property. What Can I Do About It?

This is part 1 of a 2-part series on appraisal risks. In Part 1, we discuss what to do if an appraiser undervalues your property. In Part 2, we will discuss what happens when an appraiser overvalues your property.

Appraisal Risks – Part 1 of 2: The Appraiser Undervalued My Property. What Can I Do About it? 

Introduction:

Real estate investors, mortgage brokers, and private lenders often rely on property appraisals to determine the market value of a given property. However, it can be disheartening when the appraisal comes in lower than anticipated. A low appraisal value can pose challenges, but it's not the end of the road. There are several important steps investors can take to mitigate the impact and potentially improve the outcome.

Before we begin, it is important to understand that if you will be using any form of financing (private money, hard money, or bank money), your lender will typically want to be the one to order the appraisal. There are specific situations where a borrower may want to order an appraisal on their own, but in most cases, it is not necessary. Also, borrower-provided appraisals are often viewed with a level of skepticism because in this situation, the appraiser is hired by and directly working for the borrower. Most private and hard money lenders prefer third-party appraisals that are ordered through an Appraisal Management Company (or AMC). The AMC verifies appraisers by checking things like licenses and insurance and they serve as the liaison between the lender and the appraisers. Part of the AMC’s primary functions is to ensure that there is no undue influence on the appraiser. Before you order and pay for an appraisal, be sure to discuss it with your lender because they may have specific types of appraisal orders that they will accept. Lenders do not typically base their loan on a borrower-provided appraisal.

Understanding the Reasons Behind a Low Appraisal:

If the appraisal has been ordered correctly and the values come back lower than expected, there are steps you can take. Before taking any action though, it's crucial to understand why the appraisal value might be lower than expected. Various factors can contribute to this including:

1. Market Fluctuations: Real estate markets are dynamic and subject to fluctuations. Changes in market conditions since the property was last assessed can influence its current appraised value.

2. Appraiser's Methodology: Different appraisers might use varying methods or have different interpretations of data, leading to discrepancies in valuation.

3. Property Condition: If the property has structural issues, maintenance problems, or lacks certain amenities, it can impact the appraisal value negatively.

4. Comparable Sales: Appraisers heavily rely on comparable sales (comps) to assess a property's value. A lack of recent or suitable comps close to the subject property can result in a lower appraisal as well.

5. Bias: Whether conscious or subconscious, there is no denying that bias can exist when it comes to property valuations. Unfortunately, human beings have biases and sometimes those biases show up in the appraisal report.

Here Are Some Important Steps You Should Consider: 

1. Review the Appraisal Report Carefully.

• Carefully review the appraisal report to ensure accuracy in property details and comparable sales (comps) used.
• Identify how far the comps are from the subject property?
• Note the lot size and Gross Living Area (GLA) figures for the comps. How do they compare to the subject property?
• How many bedrooms and bathrooms do the comps have and how do they compare to the subject property?
• Look for potential errors, omissions, or misstatements that could affect the value of your subject property.

2. Dispute the Appraisal Values.

• Engage the AMC and inform them of your desire to dispute the appraisal values. The AMC will provide the form that is required for appraisal disputes.
• Create a well-researched list of comparable sales to be presented in the dispute. Be sure to make it compelling because AMCs typically only allow 1 dispute per order.
• Look for comps that are within 1 mile of the subject property. Comps that are more than 1 mile away but less than 5 miles away may be considered but will typically not receive the same weighting as comps that are within 1 mile of the subject property.
• Comps that are over 5 miles away are often not considered at all. Typically, comps that are far away are also an indication that there could be other issues with the investment scenario. (For example, if you drive 5 miles in the city, you would be in a different neighborhood and property values could be very different there. Also, rural properties rarely have comps that are all within 1 mile of the subject property, so comps that are 15 miles away are usually seen as a red flag if the lender does not lend on rural properties).
• Since appraisers often pull comps from MLS, they may not be aware of certain private sales. In situations like that, borrower provided comps can be very helpful when it comes to increasing the likelihood of a successful dispute.
• Present any additional information or data that could positively impact the property's value.

3. Renegotiate with the Seller.

• If the property was under contract, a lower appraisal can affect the agreed-upon price.
• Consider re-negotiating the purchase price with the seller for a price reduction to better reflect the market value of the property.

4. Seek a Second Opinion.

• If you have disputed the appraisal but the results were still not satisfactory, be sure that you have a good understanding of why the value(s) were low.
• If the appraiser’s justifications for the lower-than-expected value(s) are not satisfactory, it may be time to seek a second opinion.
• Advise the AMC to ensure that the new appraisal is sent to a different appraiser. 

Conclusion:

A lower-than-expected appraisal value can be disappointing, but it's not a definitive setback for real estate investors. By taking proactive steps, such as reviewing the appraisal, engaging with the AMC to dispute the values, renegotiating with the seller, or seeking a second opinion can help drive better outcomes for investors.

Ultimately, each situation is unique, and the best approach will depend on various factors surrounding the property and the market conditions. Flexibility, adaptability, and a strategic approach will empower investors to make informed decisions and potentially turn a low appraisal into an opportunity for growth and increased value in their real estate investments.