This Week's Q & A

Q: We are in the process of selling our home. Before deciding on an asking price, we obtained market opinions from four respected real estate agents in our area. Their recommendations ranged from a high of $249,900 to a low of $209,000. Because our home has many special features, we settled on a price of $239,900. We received several offers, including a full-price offer, which we accepted. The buyers had been pre-qualified for a loan of $270,000, but the deal fell through, because their lender appraised the property for only $195,000 and refused to approve the mortgage amount the buyers required. We were disappointed and surprised by the lender’s appraisal, especially because it did not seem to use comparable houses, failed to consider the distinguishing characteristics of our home, and seemed to ignore completely the fact that property values are rising. Is there any way we can contest the bank’s appraisal? And what, if anything, can we do to make sure we don’t experience the same problem with the next buyer we find?

A: Let’s talk briefly about what an appraisal is. It’s a snapshot that reflects the relative value of a property at specified point in time. To develop that financial picture, appraisers look primarily at the prices of comparable properties that have sold recently in the same or similar neighborhoods. They also consider other factors – the nature of the neighborhood, features that enhance or undermine the community’s appeal, and yes, they also will make allowances for characteristics that may distinguish your property from others. But appraisers (and potential buyers, for that matter) won’t always share the seller’s opinion of just how special their property is, or how distinctive those distinguishing characteristics really are. Also bear in mind, the features that may make your property distinctive won’t necessarily increase its value.

I point that out not to insult or discourage you, but simply to suggest that at least to some extent, opinions of value will be subjective. There is room for reasonable people to differ. Sellers obviously would prefer to see appraisers, buyers (and lenders) err on the high side. While buyers and lenders may not be terribly concerned about high-side errors in a rising market, they have reason to be very concerned about paying or lending too much if values subsequently start to fall.

I know this is hard to believe within the context of the current, continuing, real estate boom, but there have been periods when home values actually have declined – a lot. Lenders and appraisers who remember those times may be disinclined to base their estimates of value on the perpetual assumption that home prices will be higher next month or next year than they are today.

That said, let’s consider the circumstances of your house and your appraisal. The appraiser’s price ($195,000) was significantly below the highest estimate you obtained, but not so far off the low end ($209,000). So one question you have to ask is whether the base line estimate you are using is accurate. Those extremely high market opinions you obtained from brokers may have had more to do with their desire to obtain your listing than with a realistic assessment of where your home sits in the current market.

If the lender’s appraisal comes in below the asking price, sellers really have only three options:

	Persuade the lender to rethink the appraisal by documenting your case for a higher price. You can do that by providing comparable sales that are more current or more relevant, or, better still, by obtaining one or more independent appraisals that support your argument.
	Persuade the buyer to make a larger down payment. The market information you gather may not change the lender’s decision, but it may persuade the buyer that the property is not overpriced.
	Lower the asking price. This is not something most sellers want to hear, but you have to at least consider the possibility that it is your price, and not the lender’s appraisal, that needs adjusting.