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How to Handle a Low Appraisal: An Interview with Nelson Sabatini of Sabatini & Company

By Nelson Sabatini

Tell us a little bit about your company and its foundation.

We are a full service residential appraisal company serving the Metro Atlanta area since 2003, and we offer reliable, accurate appraisals for the lowest prices and the quickest turnaround time.

Sabatini and Company is highly experienced in appraising residential single and multi-family properties as well as various commercial and complex properties. We have served a variety of clientele over the years including banks, individual investors, utility companies and government agencies. We have performed valuation services on various types of properties in varying conditions and situations including foreclosures, property tax appeal, easements, unimproved acreage, as well as appraisals for estates, bankruptcy, and eminent domain cases. Our appraisers apply their experience, competence, integrity and hard work ethic to every aspect of the appraisal business, which has been invaluable to the success of our company from the very beginning.

What are some of the services your company provides?

We provide services for all types of residential appraisal needs including: estate and trust management, divorce cases, setting an asking price, bankruptcy, tax appeal, P.M.I. removal, market value analysis, rental analysis and insurance purposes. In most cases we will have appraisals completed within 24 hours from the time of inspection. Our goal is to serve our clients by taking the worry out of the appraisal process. All of our appraisers are state certified and have years of experience. We do not hire "Registered" appraisers (trainees)! Our focus is on excellence in every aspect of our business. It is our promise to provide accurate appraisals in a timely manner and with the highest regard for ethics, honesty, and integrity.

Can you quickly walk our viewers through the appraisal process?

Anyone can order an appraisal for a variety of reasons, but for the sake of this discussion, let's say you are refinancing your home and you apply with a lender. As part of the loan process, the lender will order an appraisal to determine the fair market value of the home which will establish how much money you can borrow (the loan to value ratio). It is also important to note that the appraiser's client is legally defined as the one who orders the appraisal regardless of who pays for the appraisal. This is important because the appraiser is bound by confidentiality to the client. Therefore, if the appraisal was ordered by the lender then the appraiser cannot discuss the appraisal with the homeowner unless he has permission from the client, even if the homeowner paid the appraisal fee.

Once ordered, the appraiser will physically inspect the property (in most cases). During the inspection the appraiser will measure the exterior of the home, taking photos of the interior and exterior of the property as well as the street view. The appraiser will take notes about the property and its features, condition and age. Next, the appraiser will study the neighborhood and take note of the characteristics of that neighborhood.

Once the inspection is completed, the appraiser will research the neighborhood, the market activity, typical concessions and all comparable sales. He will analyze all the data and choose the best comparable sales, making market-based adjustments to the comparable sales.

Finally, the appraiser will write the appraisal report. This report will include sketches, photos, plats and maps along with a detailed analysis of the property, neighborhood and market conditions. The appraisal will include the three approaches to value which are the sales comparison approach, the cost approach and the income approach (if applicable). He will then reconcile the values indicated by the three approaches into the Fair Market Value. Understand that this is not an average of the three values, rather the reconciliation process is based on the experience, knowledge and researched performed by the appraiser.

What is a "low appraisal" and how does it differ per house/neighborhood etc.?

Appraisals are considered low normally in relation to mortgages. For instance, when a buyer applies for a loan, the lender orders an appraisal and if the value of that appraisal is lower than the contracted sale price for the listed property, it is considered a low appraisal. When refinancing a property, a lower than expected appraised value would increase the loan to value ratio which in turn would either reduce the loan amount or prevent the loan from being approved. Rarely are there complaints about low appraisals when it comes to property taxes, bankruptcies or when dealing with the IRS. In fact, I've had property tax clients complain to me about their "high" property tax appraisal and their "low" refinance appraisal only later to find out that the property tax appraisal was lower than their "low" refinance appraisal.

Low appraisals are also more likely to occur with homes that are unique. Obviously if you own a nontraditional house on 10 acres of land in downtown Atlanta there are not going to be many truly comparable sales to compare with your home in order to establish the fair market value. Both appraisers and underwriters will be very cautious not to overvalue the property and possibly even err on the side of undervaluing it. Even if your home is not significantly different from all the other homes in your neighborhood, if there aren't many recent sales to use as comparables then your home might be appraised for less than it is worth due to the appraiser using older sales or sales that are not as comparable (homes that are too little or too far from the subject, etc).

Why would someone receive a lower appraised value than assumed?

Unrealistic expectations from a home owner aside, an appraisal might be low for many reasons. In the Atlanta market, there were some lenders who were using Appraisal Management companies that were hiring appraisers from Alabama to appraise properties in Atlanta due to lower appraisal fees. Those appraisers lacked knowledge of the local real estate market which produced lower appraised values than expected. I had a client who was involved in a lawsuit over this.

Another possible reason for a low appraisal is that your neighborhood may have had a lot of foreclosed homes or Real Estate Owned (REO) sales that sold recently. Although appraisers will sometimes make adjustments for REO sales, they may not make significant adjustments for them if there are a lot of foreclosures listed for sale. In other words, foreclosures can become the market. Think of it this way: an appraised fair market value is what the property would likely sell for. If you put your home for sale "competing" against a large number of REO sales you will likely have to take less for your home if you want to sell it. We saw this happen in many areas when the housing bubble popped several years ago.

Low appraisals could also be due to appraiser incompetence or negligence. Maybe he missed something about your property, or maybe he missed some comparable sales. It's possible that his adjustments are off, or that a mistake was made. Some appraisers might be inexperienced in your market while others might just be incompetent.

What advice do you have for someone who needs to improve their appraised value?

Anyone in real estate knows the value of curb appeal. Homes will typically sell faster and for more money if they are inviting to buyers. Is the home clean, freshly painted or pressure washed? Is the lawn being maintained? Are there signs of rot and neglect on the exterior? Is the interior clean and in good condition or has the carpet been worn down to the sub floor? Basically, the homeowner should compare the condition of their home to other homes in their neighborhood. Ideally the home should be in at least average condition if not better than average compared to other homes in the neighborhood. The next step is to find out what features are in demand for your market and your home's price range. The market changes all the time. At one time avocado green and mustard yellow were the colors to have in your kitchen appliances or bath tile, yet obviously those styles have changed. A good real estate agent or appraiser will be happy to tell you what trends are popular in your market today. It may be as simple as ceiling fans in all bedrooms or it could be more costly features like stainless steel appliances and solid surface countertops. One of the most popular value-increasing improvements includes kitchen or bath remodels or adding square footage to your home. However, most home improvement project of that type do not return a dollar in value for every dollar spent.

Is it beneficial to enlist another appraiser to see if they list your home's value higher?

Possibly. If the appraisal was performed for a loan, you are entitled to a copy of the appraisal. Read the appraisal and look at the comparable sales and the adjustments made to them. Read the appraiser's analysis. You may end up understanding at least how he came to his conclusions. However, if you believe that the appraiser made mistakes that significantly impacted the appraised value, then you can request that the lender order another appraisal or go to a new lender and have them order a new appraisal. You can also independently hire an appraiser to review the low appraisal that you received. Review appraisers can also include their own opinion of value in the review while supplying reasons as to why the original appraised value was questionable.

What are some consequences of receiving a low appraisal?

A low appraisal can jeopardize a loan. This means if you are selling your house, you may have to lower your asking price in order for the buyer's loan to close. In a refinance situation, you may not be able to borrow as much money as you need or you may not qualify for the loan at all based on the loan to value ratio. Some analysts have even gone as far as blaming low appraisals for slowing the housing recovery by "killing" too many closings. I personally don't agree with that analysis because an appraisal is a snapshot of what is happening in the market, it does not determine what the market should be.

What is the best way for people to reach you or your company?

You can check out our web site, www.sabatiniandcompany.com or our sister site www.georgiarelief.com which is all about property tax valuation. From there, you can email us or feel free to call us at 770-881-7327.

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