Just before year end I told you that we were refinancing our house again, this time to a 15-year, 4.25% fixed-rate loan. The goal was to drop our interest rate by another .75% and save about $1,600 dollars per year in interest payments.
Unfortunately our house, which had dropped $55,000 in value the last time we refinanced, has dropped a whopping $35,000 more in the last 7 months.
Why? because a few foreclosures and distressed sales in our neighborhood have tanked prices. In fact, not a single non-distressed single family sale has taken place in the last 6 months within one mile of our home.
We got the news on Wednesday of last week and were taken back by the sheer magnitude of the drop. I discussed options with our lender and he suggested we verify the appraisal accurately reflected our house’s worth. If we thought it didn’t, we’d have the ability to ask the appraiser to reconsider his valuation.
Now, this is generally a long-shot. Most appraisers do a reasonably thorough job evaluating a house, and any appeal must be firmly rooted in facts the appraiser either did not consider or incorrectly considered. Of course, appraisers are human and can make mistakes, so diligence is important.
If you’re in this situation, here’s the steps you can take to challenge your appraisal. We made it through Step 4 and determined that the appraisal accurately reflected the value of the house, so we decided to look into other options, and then ultimately cancel the refinance altogether.
Steps to Appeal a Real Estate Appraisal
Step 1: Verify the appraisal contains an accurate representation of your home. Check things like square footage, number of bedrooms and bathrooms, whether your house has a deck, lot size, etc. Make sure that every aspect of the description of your home is correct.
Step 2: Verify that the comparative properties (called comps) used for valuation basis are accurately described. For instance, make sure that a house that claims to have a deck actually has a deck. This can be done by examining tax records and driving or walking by the property. If a house claims to have a deck but actually doesn’t, the appraiser may have made an incorrect adjustment to your valuation based on that information.
(Steps 3-on will likely require the assistance of a real estate professional, such as a Realtor)
Step 3: Verify that the comps chosen are the best possible compartive properties to your home. Remember that recency of sales is going to be one of the most important factors. Real estate agents will have access to multiple listing services that can show all the properties that closed within the last 6 months, and will be able to search the database by region. While appraisers will consider active listings for informational purposes, they are a last resort when it comes to property valuation. Just because your neighbors house is listed 10% above the last sale doesn’t mean the values in the neighborhood have increased proportionately.
Step 4: Verify that the comps chosen were not sold under distress. Distressed sales will likely bring a lower value than a traditional market sale. Even if the appraiser chose foreclosures, however, if the overwhelming number of recent sales in your area were foreclosures, he may use that as a basis for accepting the lower indicated value.
Step 5: Prepare a written challenge. In the challenge you will be writing back directly to the appraiser, so respect, clarity, and brevity are key. If you found deficiencies or errors in the report, create a list of those items you would like taken into consideration that should affect the value. Call the appraiser and ask him for the best way to send over the information — it could be as simple as sending an e-mail.
Under new regulations, lenders are required to select the appraiser for a purchase or refinance to eliminate potential bias in the appraisal. This can have the affect of the lender selecting an appraiser who is not familiar with the territory. This can lead to poor choices in comps or failure to consider all aspects of the property. It is always worth examining the appraisal and ensuring it is built on a solid foundation before resigning yourself to the lower amount.
What do you think? Have you ever challenged an appraisal? Were you successful? Tell us about it!
(photo credit: omaromar)
Bummer Fred….you’re not alone though…we’re seeing this on a regular basis with appraisals of new construction homes. The banks will not appraise them for the raw cost to build them. As they keep pointing out on the News…unless the banks start loosening the purse strings it’s going to be long economic recovery.
My wife and I just went through the process of securing financing for our first home, and it was a headache — despite the fact that the process went off without a hitch. I couldn’t imagine having to have dealt with trouble like a bad appraisal.
Very informative article. This is one of those things that, no matter how hard you try, there’s always a bunch of gray areas in which you just sort of trust the agents or brokers you’re working with and hope it all goes well. Any bit of information and advice on these subjects is profoundly helpful.
Sorry to hear you loss in value. With the Stone House we can only go up. It was not considered of any worth when we bought it.
Todd – Thanks for the feedback. Seems like a rather systemic problem throughout the nation. We’ve heard lenders are putting downward pressure on appraisers to make sure there’s no repeat of the 2007-2008 meltdown. I understand that, but it doesn’t make the news less discouraging!
Mike – Glad to hear everything worked out for you. Dealing with mortgage companies doesn’t rank on anyone’s top ten list of fun things, but it is a necessary evil.
I am actually dealing with this nightmare today. My appraisal was returned and to my shock it was under our guesstimate by over $20K. This was utterly disappointing to say the least. I feel the appraiser does not know the area and did not do a fair comparison. I aree with Fred, in that the problem is systematic, even 3 years after he wrote HIS comment. I’m left with a feeling that I’ve encountered bate and switch from the lenders. When the lender tells me that the appraiser could not find comparable homes that recently sold in my immediate area, thus went a little further out, is just not acceptable to me. When I did my own research, I found homes just around the corner that were comparable to mine, yet they were never considered. Very, very frustrating!
So many ads are airing on T.V. to refinance, making it sound like it’s a 5 minute ” done deal” if you ” call now”. Obviously isn’t the whole story.