The following post is contributed by John Wheaton, Redfin Open Book Lender in California
After you’ve made multiple offers and toured a lot of homes, you finally get an offer accepted! The bank has already approved your credit and income. You’ve assembled the cash required to close. You’ve started to plan your luau-themed housewarming party. Then, you get a call from your lender, telling you the appraisal came in below your offer price, and it could derail your offer. What now?
First, it helps to understand how an appraisal is calculated. An initial appraiser uses Automated Valuation Models (AVM) to arrive at his number. AVMs analyze public record data, comparable homes, and other databases to provide an estimate price of the home. Then, two or three experienced staff appraisers review it, before it undergoes a final review by the loan underwriter. The people who appraised your home’s value often have decades of appraising experience, though that doesn’t mean they can’t make mistakes or use flawed information. If you believe the appraisal for the home was misdiagnosed, ask your agent what he or she thinks and see what the Redfin Home Value Tool reports. It only makes sense to embark on the appraisal rebuttal process if you believe the appraiser left out or missed pertinent information.
If all signs point to a low appraisal, the next step is to challenge it via a written appraisal rebuttal to your lender. Though dependent on the temperature of your local market, the seller typically has the most to gain by challenging the appraisal, but will need to work with you since they can’t interfere with your loan. Still, your rebuttal may not ultimately be accepted by the bank, requiring that you either make up the difference or negotiate with the seller on price. Being cooperative and helpful with the rebuttal will build goodwill and may help both of you in the end.
Unlike buyers and sellers, appraisers place less value on intangibles like room flow and rely on data and data alone. Successful rebuttals are detail-heavy and include compelling, recent data to support your case. Here are three tips for you and your agent as you write your rebuttal.
Dig up any background.
Talk to the Listing Agent and ask how they came up with their selling price. They may know about a cash sale that never hit the MLS or can explain that a low-value sale on the record was a result of the owners selling it to their kids. Undisclosed purchase information like that can help explain a sale price and could help bump up the value.
The devil is in the details, so double-check them.
Hypothetically, let’s say you offered on a three bed, two bath, 1,800 square foot home, but the appraiser calls it a two bed, 1.5 bath, 1,650 square foot home. Try to figure why there’s a discrepancy and explain it in your report. I’ve seen a simple rectangular loft condo measured by three appraisers whose final numbers all differed by 100 square feet. It happens, so be ready to re-measure your square footage. The kitchen may not be updated, but perhaps the vinyl windows are new. Details like that are often missed by even the best appraisers and can impact your home value. Check your home inspection report. There could be crucial details in there to help as well.
Try finding different comparable homes.
Appraisers try to use comps that have closed within 90 days of your contract and within a one mile radius of your home, but they may have chosen homes that aren’t a representative sample. If you can’t find examples within that 90 day window, look for matches 1.1 miles away and 92 days old, as banks will probably still consider it valid. Depending on the pace of closings in your area, some “pending sales comps” in the report might have been recorded at the county, but don’t yet show in the MLS. Your realtor can help dig those records up. Appraisers often require four or more new comps to justify a value change. Use MLS data whenever possible, not something a simple Google search might provide, and avoid referencing Zillow Zestimates. Most appraisers reject Zillow data outright due to its self-reported margin of error (about 9.1%).
Successful rebuttals are exorcised of emotion and contain compelling and reasonable closed sale data. When they’re done well, they can recalibrate the appraisal in your favor. However, sometimes as hard as it might be to accept, the value just isn’t there. Remember that an unsuccessful appraisal rebuttal is not necessarily the end of the deal. Your lender and your agent will have other ideas for how to proceed, and will do what they can to keep your housewarming luau moving closer to reality.
If you’d like more information, you can contact John Wheaton through his profile on Redfin Open Book.