Low Appraisal? How to Keep a Home Loan and Sale From Collapsing

There are several steps you should take.

First, talk to the seller. Even if real estate agents are involved, I would try to communicate directly with the seller and not go through the intermediaries. Explain that the appraisal came in very low and that you cannot afford to put up the cash difference. While you are obviously reluctant to lose your $10,000 deposit, that may be the only alternative.

Your seller may recognize that this is now a slow real estate market. Your $10,000 deposit -- which, by the way, the seller will most likely have to split with the agents -- will not go far. The seller needs the sales proceeds to buy another property.

Thus, you may be able to negotiate a lower price. My definition of a dispute settlement is one in which both parties may walk away unhappy but nevertheless walk away. Perhaps you can agree with the seller to split the difference between the contract price and the appraised value; this arrangement would be consistent with my definition.

You should also ask for a complete copy of the appraisal report. Perhaps the appraiser did not fully do his homework. Did he physically inspect the property? Are the comparable sales that were used appropriate? Is the appraiser licensed in the jurisdiction where your unit is located, and does he know and understand the neighborhood conditions?

Indeed, banks as well as borrowers want to avoid faulty appraisals. Beverly A. Bayer, a member of the National Society of Real Estate Appraisers, wrote an article for Working RE magazine (July 26) titled "Appraisal Form 'Gotcha' Traps (From an Appraiser Who Knows)."

Bayer wrote, "Lenders are tired of appraisers slapping together reports with limited research and analysis." She lists a number of "gotchas" lenders are using to catch what she calls "the most lazy and dishonest" appraisers. Such traps that could trip an appraiser include:

· When an appraiser claims to have checked a particular source and found that there were no prior sales, when indeed there were some.

· When an appraiser claims to have read sales contracts but misses concessions that affect value.

· When an appraiser does not discuss how marketing issues such as a listing's length and price changes affect value. "If the contract price is higher than the last list price, [the appraiser] will need to discuss why that happened or -- Gotcha!" Bayer wrote.

Appraising real estate is not a science. It is often subject to individual interpretation. If the appraisal comes in lower than you think it should, go to the appraiser and ask him to review his report. Point out any discrepancies -- such as three bathrooms instead of the reported two.

This may help. If the appraiser is unwilling to cooperate, ask your lender whether it is possible to get a second opinion from another appraiser.

You may think of blaming your real estate agent. She told you the property was worth $500,000, and you relied on those representations. Can you sue? A recent D.C. Court of Appeals case ( Carleton v. Winter , June 15) gives some guidance.

In the Carleton case, a real estate agent recommended a home inspector to a potential buyer. She described the inspector as "great" and "particularly suited for young people who were first-time home buyers."

It turns out the inspector may not have been as great as promised. But when the Carletons sued the agent for misrepresentation, the D.C. Court of Appeals denied their claim, stating: "Fraudulent misrepresentation requires, inter alia , a false representation as well as knowledge of the falsity. . . . There is nothing in the record to show either that these representations by Winter were false or that she knew they were false. . . . Moreover, we have noted on previous occasions that 'a prophecy or prediction of something which it is merely hoped or expected will occur in the future is not actionable upon its nonoccurrence.' "

Unless you can prove that your agent falsely and deliberately misrepresented the value of your condominium unit, you do not have a cause of action against her.

In reality, you would have no one but yourself to blame. As a buyer, you should insist on including the financing and appraisal contingencies in your sales contract. As far as I'm concerned, not doing so could be considered a form of contributory negligence.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036.