Denver Real Estate Law and Family Law Blog. (Vol 1.63) September 8, 2015
By Craig Franklin Chambers Esq. 7851 S. Elati Street #204, Littleton, CO 80120
The Littleton Lawyer.
As a Colorado Real Estate and Divorce Attorney, practicing in Denver (Littleton, Highlands Ranch, Ken Caryl, South Jeffco) and the surrounding areas including Arapahoe, Douglas, and Jefferson County, I am often asked: What should I do if the appraisal comes in low.
Appraisals are required by the lender -- and the appraisers are selected randomly from a list of qualified appraisers depending on the type of loan. Different loan type have different requirements.
Appraisers are licensed by the Colorado Real Estate Commission and are required to use the approved guidelines for appraisers in determining the value of a home for the lender. Traditionally, FHA loans, the easiest for a buyer to obtain, in addition to assessing the value for the lender, often make conditions on the appraisal based on observations of the home. As the real estate market escalates, the ability of appraisers to keep up with the market is one of the biggest hurdles in closing a real estate transaction.
First, you need to consider the recent sold comparables which is what the appraiser will use in forming his opinion of the value of the home. If there are favorably comparables that have not yet closed, an appraiser can't use them . He can only use recently closed sold comparables of homes of similar styles and floor plans.
One strategy to avoid this problem is to delay the appraisal deadline until the pending under-contract transactions. Given that the appraiser must use the most recent comps for an appraiser, this is the surest way to make sure you don't have a problem with the appraisal as to the value of the home.
Second, an appraiser is supposed to use comparables in the same neighborhood, but he is allowed to use comparables in a nearby area if necessary. I suggest meeting the appraiser at the home for the appraisal and giving him comps to consider both comparables in the area as well as in nearby neighborhoods. He may or may not consider them. But the easier you make the job for the appraiser, the better, and the more likely the value will come in as the terms of the contract.
Third, , appraisers only know the comparables and the home from what is advertised in the MLS listings . If you provide information the appraiser can use about your home or the comparable properties to differentiate the home from the comparables, this can affect the value of the home.
If the appraisal does come in low, as a Buyer you have five choices. First, you can challenge the appraisal, provide comps and appeal the appraiser's decision. Second, if you like the home, you can pay the difference between the what the lender will loan on the house or the contract price. If the market continues to increase, the difference you pay may very well be worth closing on a home you like. Third, because the home didn't appraise, you can try and renegotiate the contract price with the Seller. With an FHA appraisal, the Seller is stuck with that appraisal for 6 months, and will either re-negotiate the priced or be forced to sell the home to another buyer without FHA terms.
By the same token, if the Seller agrees, you can pursue alternative financing, i.e. if the loan is FHA, switch to a conventional loan, if possible. Perhaps the conventional appraisal will meet the value set forth in the contract.
Lastly, if the appraisal comes in low, and you notify the Seller by the deadline in writing within the real estate contract, you can walk away from the deal.