I was recently asked to reconsider my opinion of value on a “low” appraisal. The house was listed at $239,900 and came under contract at $239,000 with 3% seller paid closing costs, meaning that the seller was receiving $231,830. My opinion was $232,000.

The contract was based on a 5% down mortgage. My client, the lender, ordered the appraisal to evaluate their risk in lending 95% of the purchase price.

I’m not a banker, but it makes sense that they would be very concerned about the value they are lending against. If it were 50% down, the borrower would not be likely to walk away, and if they did, they could absorb the costs of selling the house and still get their money back. But at 5% down the collateral becomes very important.
Lenders want to see proof that the collateral is worth enough to support the loan.

They want to see what the most similar houses are selling for, in case they become a seller. They are thinking about size, distance, time, age, BR count, bath count, age, etc. In practice, guidelines have been established so that when they are processing a loan, appraisals that do not conform to these guidelines get extra scrutiny. They want to make sure the appraiser is not just hitting a number to get a deal done.

As they read the appraisal, they are looking for something called bracketing. This means that there is at least one comparable that is equal or inferior in measurables like GLA (above grade square footage not including basement or porch), above grade BR count and above grade bath count. Secondary features like basement finish, garage stalls, fireplaces etc should also be good matches.

Things that make them nervous are values based on new appliances (try financing appliances for 30 years), landscaping, décor, anything that will depreciate quickly with time or fashion.

When I was asked to reconsider value, I asked the agent to send me at least one example of a house that is smaller that sold for more money. The closest one was over 4 miles away. The distance may not be important to a particular buyer, but it does raise the question of how the appraisal could be low if there was nothing smaller nearby that sold for more.