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Chat Plus: Questioning the Appraisal

We had a particularly active online chat on Friday. This was one of the questions I couldn't get to during that hour. Our next chat is scheduled for Friday, Oct. 2.

Outside Annapolis: Hello, and thank you for the chats! I am desperate for some advice right now. It's another of those "appraisal came in too low" type questions, but with a twist. I tore down the old house I'd been living in for 10+ years, and the new house is under construction. I guess I should have anticipated cost overruns, but I was naive.

The builder said the bank should have no problem lending me additional funds. On the appraisal one year ago, I had over 20 percent equity and was okay for the loan amount. I thought the appraisal then was fairly conservative. The bank needed a new appraisal because the previous one was over 1 year old. It took forever to get the permits and to get started, even for this small house in the middle of 18 acres.
The bank is still working, but I was told the appraisal was for less than the old appraisal!. The builder said he'd never had anything like that happen.

My property is a small horse farm in one of those formerly farm regions that's now chock full of McMansions on two-acre lots. As you can imagine, comparables for this kind of property aren't that easy to come by. A little property just down the street sold recently, and may have influenced the comps, but that place isn't really comparable. It's got five-ish acres, but it's woods and streams and swamp - not pastures and fences and a fancy barn like my property.

How should appraisers handle somewhat unconventional properties? (Mine is not at all unusual for this area - it's not like it's a horse farm in the middle of the city...)
Can I ask for another appraisal? The bank isn't changing the terms of the construction-to-perm loan, but the dreaded "PMI" (private mortgage insurance) was mentioned! Noooooo!

E.R.: Lesson One: Never listen to a builder who assures you about any aspect of financing. That's not their area of expertise, and they simply want you to sign a construction contract, anyway. Paying the tab is ultimately your problem.

The Home Valuation Code of Conduct that went into effect in spring says borrowers must be given a copy of their appraisal no later than three days before closing. Ask your lender to supply a copy ASAP. And if the comparables really do not compare well to your home, write a letter to the lender explaining in detail why you think that appraisal is not accurate. Push the lender to ask the appraiser to consider your objections, and ask for a second appraisal, if necessary. Even if you have to pay a couple of hundred dollars for a second appraisal, it will be cheaper over the long term than paying PMI. Come back to the chat and let us know how it goes!

By Elizabeth Razzi  |  September 21, 2009; 6:00 AM ET
Categories:  Chat Plus , Mortgages , Remodeling and repair  
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