A rebuttal letter can help you fight a lower-than-expected home appraisal
The buyer is ready to buy, and the seller is ready to sell. Then comes the low blow: The home is appraised below the contract price.
A lower-than-expected appraisal typically means a borrower must come up with a higher down payment or lose the deal, said Allen Cravello, president of American Capital Corp., ACAS +0.41% a mortgage lender and broker in El Segundo, Calif. A possible recourse, albeit one with slim chances, is a formal rebuttal letter, also called a reconsideration letter, prepared by the borrower or loan originator, with input from a real-estate agent or an appraiser.
Evidence of incomplete or inaccurate work can persuade a lender to assign a new appraisal, giving the borrower another chance to qualify at the desired loan amount, said Mathew Carson, a mortgage broker at First Capital Group Inc. in San Francisco who was an appraiser before switching to lending.
Appraisal problems can have a big impact on a transaction. In May, 9% of real-estate agents reported a contract cancellation, 10% reported a delay and 13% experienced lower sales price negotiations due to a low appraisal, according to the National Association of Realtors’ existing home sales survey.
To challenge an appraisal, borrowers should make their case with the commissioning lender, said Michael Vargas, president of New York-based Vanderbilt Appraisal Co., which specializes in high-end homes. Lenders, however, are prohibited from communicating directly with appraisers, under the Home Valuation Code of Conduct (HVCC), rules enacted by Congress in 2009 to reduce mortgage fraud. Therefore, the lender will commonly send the borrower’s rebuttal to an appraisal-management company, a third-party entity that hires appraisers, for review.
The key to successfully rebutting an appraisal is leaving emotions at the doorstep, Mr. Vargas said. A rebuttal needs to be limited to factual errors, flawed methodology by the appraiser and/or additional new or missed “comps,” which are recently sold homes that are comparable to the home that is for sale.
During the housing crisis, comps were sometimes hard to find, and appraisers often included foreclosures or short sales. However, with home sales improving, it is now worth pulling more comps to see if an appraiser missed something, said Sara Benson, president of Chicago-based Benson Stanley Realty who has successfully overturned low appraisals of upscale homes.
Also, because appraisers use Multiple Listing Service data typically accessible just to real-estate professionals, it is highly recommended that the borrower hire a review appraiser or expert local real-estate agent who has access to the same data, Ms. Benson said.
Appraisals of luxury homes should be detailed and display a higher level of specialized knowledge than those for conventional homes, said Chip Wagner, an appraiser in metro Chicago. “The appraiser must have a grasp on the newest technologies, the highest quality materials and upper-end appliances and how they contribute value,” he added.
Still, home aesthetics also are subjective, so upgrades shouldn’t be overemphasized in a rebuttal, Mr. Wagner said. He said he recently appraised a $3 million home with a foyer done in expensive Italian tile, but he heard later that the new owners immediately ripped it out when they remodeled.
“The people who can afford to buy high-end homes can also take out those high-end features,” he added.
One common issue cited in recent rebuttals has been the quality of the initial appraiser. Many real-estate agents and lenders say that experienced appraisers, who in the past worked independently and set their own rates, left the business when HVCC regulations made them subcontractors for appraisal-management companies, where they took a substantial pay cut.
This exodus resulted in less experienced appraisers who may come from miles away and not be familiar with the property area, Ms. Benson said. Mr. Carson said he has seen AMCs send appraisers from Sacramento, Calif., to assess a San Francisco home.
A borrower who can prove that the appraiser lacked market familiarity, experience or had a history of disciplinary issues can cite these facts as grounds to disqualify an appraisal, Ms. Benson said.
A rebuttal report should include data, exhibits and professional opinions to support any errors in the appraisal.
Ms. Benson recommends stating at beginning and end that if flaws and discrepancies aren’t addressed and promptly corrected, the appraiser will be reported to the licensing board for further investigation.
To add impact, have the rebuttal professionally bound by a print shop or copy center. Copies should be sent to all involved parties in the transaction, including the loan officer, underwriter, bank president, buyer’s and seller’s attorneys and agents, buyer, seller, appraisal management company and the appraiser whose work is being challenged, Ms. Benson said.