Low Home Appraisal: What to Do

Don't let your real estate deal get scuttled by an inaccurately low home appraisal.

Whether you're buying or selling a home, you may have cause for concern that the deal will fall apart for reasons that weren't on the real estate radar a few years ago -- that the appraiser (usually sent by the buyer's lender) will assign the house a value that's significantly lower than the agreed-upon sale price and that, as a result, the lender will refuse to loan more than the house is worth. Unless the buyer can come up with more cash (which already assumes that the buyer isn't put off by the discovery that a real estate professional thinks the buyer is overpaying), the deal may end right there.

What's Changed With Appraisals?

This trend toward problem appraisals is relatively new. Part of the issue is the Home Valuation Code of Conduct (HVCC), a 2008 agreement between two federal agencies, Fannie Mae and Freddie Mac. The HVCC requires that appraisals on any loan that the originator plans to resell to Fannie or Freddie (a common scenario) be done by an independent professional, not someone employed or influenced by the lender or mortgage broker.

Sounds good so far but, early on, the HVCC was interpreted to mean that the appraiser had to be chosen by an independent third party. And, according to reports, the third party's choice of appraisers wasn't always appropriate. Many disappointed homebuyers and sellers felt that their appraisal was badly done, by someone who didn't know the local area and perhaps didn't even know how to handle the appraisal job in a professional manner.

Fortunately, the federal agencies involved in this have since clarified their meaning, and the problem seems to be going away. Nevertheless, while the dust settles, it's worth monitoring who does your appraisal and how accurate the result is.

Get an Appraisal You Can Live With

A faulty appraisal shouldn't -- and needn't -- derail your sale. Appraisers operate under a set of national rules known as the Uniform Standards of Professional Appraisal Practice. You can read them yourself -- they're not very long -- by going to the Appraisal Foundation's website at www.appraisalfoundation.org.

Of particular note is the section of the standards called "COMPETENCY." Take a look, for example, at where it says "the appraiser must understand the nuances of the local market." If your appraiser doesn't, you have grounds to demand that another appraiser be sent to evaluate the house you're planning to buy or sell. With everyone in the transaction probably demanding the same thing, the third party is likely to listen.

The homebuyer may alternately try to come up with the extra cash to match the appraisal amount, or look elsewhere for a loan, hoping to encounter a more generous appraiser.

If none of these options work, the seller is going to have to decide whether to accept a lower price -- likely, the appraised value, which is the maximum the lender will allow the buyer to pay.

For more information on appraisals and other steps in the home buying and selling processes, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo) and Selling Your House: Nolo's Essential Guide, by Ilona Bray (Nolo).

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