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[caption id="attachment_9654" align="alignright" width="150"] Dave Hershman[/caption]

Dave: I always hear about appraisals coming in low. But that is not an indication of trends because I am likely to get questions when things go wrong, not when they go right. However, today with home prices higher, you are going to see more low appraisals. When there are multiple contract offers and the home sells above the asking price, the chances of a low-appraisal becomes higher.

Of course, you are talking about a refinance. I find that there are more low appraisals on refinances because of two main reasons:

• Many homeowners have an inflated idea of what their home is worth. This issue has become worse because they get emails all the time from home buying websites telling them what their home is worth. If you have been in this business for any length of time, you have run into this. On purchases, the seller has the advice of a real estate agent who can produce a comparative market analysis (CMA).
• Also, on purchases, the seller has a sales contract which gives some evidence of market value because someone is willing to pay that amount for the home. While not figured into the calculation, there is a target the appraiser is aware of. On a refinance, there is no recent sales contract. They only have what we are requesting as the value, which is much less of an influence.

Whether it is a purchase or refinance, how can you lessen the chance of a low appraisal? In the COVID-19-era, consumers have more of a choice, as many appraisals are eligible for a drive-by or desktop review. That choice may affect the appraisal amount.

If the property shows poorly and has no updates, you may not want an inspection. If the property is immaculate and completely updated, you may want the appraiser to see the property. The options should be discussed with the agents and consumer. Ultimately, it should be the purchaser's choice when there is an option.

Regardless of whether there is an inspection, if there is any chance of a low appraisal, the owner should be providing a list of home improvements with their costs. Remember that ordinary maintenance will not affect the value, but if someone has spent $50,000 in upgrades, plus there is a new roof and air conditioning unit, this could be a factor. The listing agent should also provide a list of comparables for the appraiser to consider. Remember, comparables must be sold and they also must be recent and similar to the subject property.

While these additional steps won't eliminate all low appraisals, they will help tremendously. Success is not an accident. You must plan for success.

Yes, there is a preponderance of low appraisals in a rising market and you can lessen the chance you will get a low appraisal. But, you will not eliminate low appraisals. Thus, we will shift to the question: what can you do when you get a low appraisal? There are three basic choices:

• The buyer can accept the low appraisal and pay the contracted sales price. In this environment, with competition for available listings, this is happening with great frequency. However, keep in mind that this will raise the LTV of the loan and if already at a maximum LTV, more cash may be needed. Even if not at a maximum LTV, it could raise the costs of the loan and/or mortgage insurance.
• The buyer and seller can negotiate a new sales price. If the sales price is lowered, an addendum will be needed, and the loan amount would need to be automatically lowered if a maximum LTV loan.
• The buyer can appeal the appraisal. Here you must do two things: read the appraisal carefully and challenge anything wrong which might affect the value. Perhaps the document is missing a room or a finished basement.

Assuming you gave the appraiser updated comparables at the beginning, see if any have closed since that time which might support the value. Keep in mind that the sales have to be closed before the date of the appraisal, although the appraisal date can be updated to reflect new information.

Dave Hershman is Senior VP of Sales of Weichert Financial. He has published seven books, as well as hundreds of articles, and is the founder of the OriginationPro Marketing System and Mortgage School. His site is www.OriginationPro.com and he can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..