I’m in the process of buying a condo, and the appraisal came back quite a bit lower than the purchase price. We’ve already done the contract and were about to close. What are my options at this point?
Can I contest an appraisal? If so, how?
I suspect the comparison properties they examined were sold very low because they were purchased by family members and/or friends. Could this help me in any way if it can be proved?
Should I walk away from this?
I take it you need an appraisal in a certain amount in order to justify a loan in a certain amount in order to buy the property.
If so and you still want the property, then talk to your lender or real estate broker. If there was no clause in the contract subject to an appraised amount or loan amount, then you’re stuck buying the property.
You obviously thought the condo was worth it when you signed the contract, if you still do, close. If you don’t, then subject to contract provisions you can walk away. Or maybe you can rehash a lower price.
Just my personal view, walk.
Appraisals are sometimes more art than science. If the difference is not too huge you can often simply get another appraisal from an appraiser that the bank will accept. The real issue you need to be concerned about (unless you are obscenely wealthy or you just don’t give a damn) is the appraised value disparity issue and whether it’s “real” or not. In a hot market prices can be bid up the point, that when things cool back down, the property might not be able to recoup it’s purchase price if you need to sell.
If you love the property and don’t plan to sell for quite some time and have the means to purchase it despite the appraisal disparity then the value issue will probably work itself over over time. If, on the other hand, the purchase is intended to have some near term investment value, starting out upside down is probably not the best way to start out.
When I bought my house over 5 years ago the appraisal came in about $3,000 too low. My buyers’ agent did two things for me: (1) informed the sellers’ agent of the appraisal (and they lowered the price); and (2) asked the appraiser to reconsider (which he or she did, and he or she upped the value, luckily not needed).
Because of the quantity of houses on the market, mine is not getting a lot of traffic (for sale now). When I do get a bite, I hope the appraiser will be generous to the purchaser, since it’s in my interest, too.
Why not use the low appraisal as a bargaining point and try to get the sellers to lower the price?
As aahala mentioned, inform your broker or, barring that, your lender. The lender may or may not care, it’s up to the loan officer at this point.
You may want to shop around for another appraiser, but as astro mentioned, it needs to be one approved first by the lender. This is standard FDIC regulation (I assume your lender is FDIC insured…)
If you have reason to believe that the parties that were involved in the comparables used in the appraisal were related in any way, this is damning evidence against the comparables that were used. The specific phrase you want to use is “not arms length transactions.” If the appraiser in fact used sales that weren’t arms length, he fucked up tremendously, unless he a.) noted it in the write-ups of the comparables, b.) made some sort of adjustment to them to account for this, if necessary, and c.) had nothing else to work with. Now, it may very well be that these non-arms length transactions were at market values, and maybe actual good transactions won’t help your case, but they’re not considered to be good indicators of actual market value.
Basically, there’re two possibilities: the appraiser screwed up, or the appraiser is correct. If he or she is correct, I’d walk away from it unless there’s something about this condo that makes it worth that much to you (and you’re not scared of selling it for less money down the road). If you’re convinced the appraiser screwed up, do the stuff mentioned above, and be sure to note to the lender or broker that you believe the comparables used (“sales comps” in the lingo) were not arms length. Put together any solid evidence you’ve got of this to help make your case.
You may also want to shop around in your area for a different appraiser, preferably one that is “certified” by your state appraisal board, rather than one that is “licensed” (any appraiser will make note of this, if they mention that they are “licensed” then they probably are not “certified”). If you’ve got some time on your hands, your local county assessor may have an online database that you can check for recent sales in your condo development.
Good luck!
-desdinova, general real estate appraiser