What to do when an appraisal comes in below the selling price

When Stefan and Jennifer Hull beat out other interested buyers for a four-bedroom, two-bathroom Cape Cod house in Bethesda, they felt sure they’d gotten a bargain at $759,200. They were shocked when their lender’s appraiser valued the home at only $744,000.

Because of the low appraisal, their bank would only give them a $595,200 mortgage, instead of the $607,360 they’d been approved for initially. The Hulls said they didn’t believe the home was worth the lower appraisal amount — it turned out that the appraiser compared their home only to other Cape Cod-style houses, some more than a mile away, while ignoring closer-in comparable sales — so they pulled an extra $9,960 from their savings to make up the gap. The seller agreed to lower the price to $757,000, which was the next highest competing offer for the home.

“We were none too pleased,” said Stefan Hull. “If you look in the area, there was nothing selling under what we had purchased it for, for the same square footage, and we had a nicer house. When we saw the houses he compared it with, we said, ‘You’ve got to be kidding us.’ ”

As the real estate market heats up and prices continue to recover from the 2008 housing crash, more home buyers and sellers are likely to encounter the problem of an appraisal that is lower than the agreed-upon sale price. After all, appraisals must be based on recently settled transactions, and in a rising market those past transactions are likely to be lower in price. Whether you’re a seller or a buyer, it’s important to understand the risks involved around low appraisals — and the options available to you.

“Whenever you have an increasing market, and in certain pockets we have that now, appraisers’ hands may be stuck,” said Traci Levine, a realty agent with Long & Foster in Bethesda. “They go by past history and not future sales.”

Moreover, because of new restrictions on the relationship between lenders and appraisers — aimed at curbing the appraisal abuse that contributed to the housing bubble — buyers and their mortgage representatives have less control over the process. Lenders simply order an appraisal from a list of approved appraisal companies, and a third party directs the individual to perform the appraisal.

“I’m all for not having an appraiser in your back pocket, but to be able to actually pick appraisers that live in the area would be a major differentiator,” Hull said. “They have no idea where these guys are coming from. That hurts the overall housing market.”

One of the contributing problems is the growth in appraisal management companies, which may award appraisals based on low cost rather than the expertise and skill of the appraiser, said Sara Stephens, president of the Appraisal Institute, the largest professional association for real estate appraisers.

“In some cases, cheap and quick is certainly the mantra, and not professional experience and understanding of the market,” Stephens said. “That’s a real issue for a lot of buyers and sellers going forward.”

Preventing a low appraisal

Still, there are a few steps that sellers can take to prevent an inappropriately low appraisal. “There are a lot of agents who just give the appraiser a one-day code to their lockbox,” Levine said. “I take appraisals very seriously. I always meet appraisers at the property and I bring the most relevant comps. They don’t have to take them, but most do.”