Second Appraisal..
Hello all. This has come up a few times in our rehabs, and I've been pretty worried because we had a property in the past where the buyers backed out due to low appraisal. Has anyone dealt with the 2nd appraisal coming in low and how do you deal with it? Is it a good idea to meet the appraiser at the property? I'm sick and tired of these appraisals..
There are a number of approaches to dealing with bad appraisals that I've had success with. In brief:
1. Immediately hire an appraiser myself to do a field review and pick apart the appraisal.
2. Try to get the buyer/agent/lender on board to ask their appraiser to review what your appraiser came up with.
3. Depending on how financed, local may have ability to adjust value, ~3% is the number I've seen.
4. Then ,again depending on financing, start the formal appeals process. You many be able to short circuit this by contacting the regional controller direct.
The key is to avoid a low appraisal in the first place -- once the appraisal comes in low, there's a very, very good chance there's nothing you can do about it at that point.
Here's a controversial post I wrote on the topic last year:
http://www.biggerpockets.com/renewsblog/2011/01/19/controlling-and-conquering-your-appraisals/
Btw, second appraisals are much easier than the first (assuming the first came in at contract price or higher) -- just hand a copy of the first appraisal to the second appraiser and say, "You're doing a second appraisal for this property, as this is an FHA loan. Would you be interested in a copy of the first appraisal?"
95% of the time he'll take it, and the second appraisal will come in just fine as well...
First, you should find a differnet bank, one that does not do 2nd appraisals especially if they did one already. f you see a pattern with the same appraisers coming in low you might want to get on their good side. What we do is we have pre appraisals done on our properties so when it comes time for the bank to do the appraisal I have a real one to give to the bank appraiser. Side note : the appraiser I hire is one who is in the appraisal shuffle for the bank I refer my clients to use.
Curt Davis, when a buyer is using FHA financing, the choice is not up to the bank. It's an FHA rule that a second appraisal be done if the seller's purchase price was for less than 50% of the resale amount.
To mitigate these problems I remove the key from the lockbox as soon as the house goes pending. That way I never run the risk of an appraiser going in without my consent (especially if the buyer's agent gives out the code...I've had that happen before). I then personally meet the appraiser at the house and walk him around to make sure he's clear on the improvements made, etc. Before he leaves, I politely give him a folder containing a list of the improvements and comps. I also ask him if he has a copy of the PA (they always do, but it subtly reiterates what I'm getting at without talking numbers).
On the second appraisal I do the same thing. The only other thing I add to my dialog with the appraiser is that the 1st appraisal came back just fine and he shouldn't have any problems. I leave it just at that.
So far, this method has treated me well. I've never had an appraisal issue.
I'm having an issue with this right now myself. The first FHA appraisal though the AMC came in low. The second appraisal the buyer's lender ordered did however come in at contract price. I left a folder for both appraisers containing comps, list of improvements, and contract.
Lender is helping with a value appeal on the first low appraisal, and they say we should hear something back early this week.
I've not been in this situation, and my question is, if the first appraiser does not give us a break and change his opinion of value that's the end of it? Is there any way a lender would/could still get it done?
I don't want to spend too much time waiting on this deal to work if it's not going to, and if I have to I want to get started on my backup plan.
From my experience, appraiser's wont change their value and banks will not "work" it out if one comes in lower. You will have to just lower the price for your buyer or find a new buyer. Good luck.
Do you know how lenders decide how much they're willing to lend when they have 2 appraisals of two different values? Do they automatically go with the low one or an average of the 2 or something like that?
I just went through this exact problem. I bought a house in January for $17,000. I fixed it up nice and sold it to a first time buyer for $73,000 who was approved for an FHA loan. I was paying 6% seller concessions. I was concerned that it wouldn't appraise, but I met the appraiser at the house and gave him a stack of comps that were all from a nicer neighborhood about a half mile north of my property. I showed him all of the work that I had done to the house and showed him one particular comp that had sold for $91,000.
The appraisal came back at $73,500. $500 more than my selling price! I thought everything was cool until the loan officer called and said I need a second appraisal. I didn't think I would need one since I had owned the house for longer than 90 days, but turns out I did. I met appraiser #2 at the house. Again, everything seemed cool. I gave hime a copy of the PA, stack of comps, and copy of first appraisal.
Turns out that he checked into the comps further. The $91,000 comp from the MLS was reported wrong and only sold for $72,000. Appraiser #2 was only able to appraise my house for $70,000 because of this and because of a lack of other high comps. There were a lot of foreclosures and short sales in my neighborhood. I gave both appraisers comps from the nicer neighborhood, but the houses were nicer and had to be adjusted accordingly.
Now my choices were to either try and sell this house to someone else with a conventional loan and hope it appraised, come down $3,000 with the current buyer, or meet somewhere in the middle.
Fortunately for me, our market in Michigan is on fire and there is a shortage of nice houses on the market. The buyer was also anxious to get in and had already come a long way. To make a long story short, I agreed to come down $1,500. We lowered the sale price to $70,000, but I paid $1,500 less in concessions. The buyer came up with $500 and the selling agent and loan officer kicked in $500 each.
I still did really well on this flip and would do the deal again. It was just a bummer having the first appraisal come out ok and then have the next one be low.
Yeah I should know more in a few days. Our market is going pretty well at the moment also, and I'm pretty sure I have a conventional buyer who still might be interested. The comps are there and it's unfortunate it's ending up like this because it's a great property and the buyer has no place to live as they sold their last home days ago.
Originally posted by Ryan Fatula:
Do you know how lenders decide how much they're willing to lend when they have 2 appraisals of two different values? Do they automatically go with the low one or an average of the 2 or something like that?
They will value the property at the lower of the two appraised values, and will lend against that value.
Originally posted by J Scott:Originally posted by Ryan Fatula:
Do you know how lenders decide how much they're willing to lend when they have 2 appraisals of two different values? Do they automatically go with the low one or an average of the 2 or something like that?They will value the property at the lower of the two appraised values, and will lend against that value.
Plus the FHA records the lowest appraisal value against your property for 60 or 90 days. Don't remember the exact time. FHA is getting tough to work with when it comes to hitting sales contract vs FHA appraisal values.
This seems to be potentially a huge problem for housing market recovery -- how do prices get back to normal when FHA takes the lowest of 2 appraisals and the seller then must sell at that price or find another non-FHA buyer? If they lower the price and sell, it creates a new lower-priced comp for the next home under contract in the neighborhood, driving the prices down below what the buyers were actually willing to pay.
Originally posted by Jim S:Originally posted by J Scott:
They will value the property at the lower of the two appraised values, and will lend against that value.Plus the FHA records the lowest appraisal value against your property for 60 or 90 days. Don't remember the exact time.
Actually, it's 6 months!
I have been working closely with the buyers lender who seems to think he can get the first appraisal essentially thrown out, and get a third appraisal to go along with the second which came in at value. I'm not sure if this really can be done or not, but then again Ive never been in this situation before so its new to me. The "bad" appraisal apparently had such wildly large single line item adjustments that the lender said its the most ridiculous appraisal hes ever seen and is really pissed off about it. I am pleased he is working so hard to try and make this deal work but the appeals process has been going on for about a week and I don't want to wait around much longer and lose my backup conventional buyer who is still wishing to purchase the property.
I agree with what's being said above about how can we expect a market to improve with low FHA appraisals, especially considering how many buyers need to use FHA financing. It's extremely frustrating.
Yes, it's true that the lower value stays with the FHA appraisal, however, if their are NEW comps from the time of the old appraisal to time of new sale, then the NEW comps can be used to support an adjustment for higher value. It's very difficult to change the value if NEW comps haven't recorded since the previous appraisal was done.
MEET THE APPRAISER AT THE PROPERTY! Go prepared. . . I take a very detailed list of "all" upgrades we made to the property. I give the appraiser pics from "before" the remod to show how extensive the remod was (old kitchen, old baths, old landscape, etc). When you acquire the property, take ALOT of pics before you start work, so you can prove the change in condition! I also point out things like new hot water heater and other misc like that which aren't so obvious, but important. If you try to help him with this type of data & pics, it makes his job alot easier to justify his value in his report.
We flipped 14 houses so far and only once, did we have a slight value problem. We anticipated a problem on that one because there weren't any comps to support the full price offer. So we came down to the appraised value, which is actually what we anticipated it selling for (didn't expect full price offer).
From now on I will be meeting them out there. I thought that a folder left on the kitchen counter containing comps, contract, list of improvements, and copies of all receipts and invoices would be sufficient.
Plus, the comps are all there to support contract price, they are not difficult to find and are within 6 months and 1 mile out or less. The appraiser decided to make wacky single line item adjustments of around 40% for gated community vs our non gated community. That's a massive line item % adjustment, especially considering any appraiser has to explain any line item adjustments over the 10% guideline.
Ryan... I don't think that leaving receipts for the appraiser is a good idea. Some appraisers have a mind set, that they don't want to see an Investor make more than "x" profit. Many rehabbers get deep discounts on material & labor (if you're doing a fair amount of rehabbing). An appraiser doesn't need to see these costs... it could hurt you instead of help you. The important thing is to just DETAIL ALL IMPROVEMENTS and provide "before rehab photos". This makes them very happy. Also, if we start providing them with receipts, it may become customary for them to start asking for them!
Also, I point out certain things on comps like "we have new fencing & fencing on another comp is very deteriorated". "We have granite countertops but another remod comp was just tile countertops", etc, etc. You get the jist.
Donna, you're probably right in regards to appraisers not wanting to see investors making a hefty profit. This particular property, IF it closes at contract price, I am going to do extremely well on it. I did not want to claim that I thought this was also possibly a case of a jealous appraiser, but I kinda do.
I probably would not have provided invoices if the lender did not ask me to do so to help justify everything.
Even though I didnt start this thread, I appreciate all the replies. This seems like quite the hot button topic!
Here are a few tips on things that I have done to control this appraisal issue and mitigate the risk of low appraisals:
1. Try and find a lender that is familiar with FHA flips and has a pool of appraisers they normally use. The lenders I work with usually have 5 - 7 that are on their "list". Then have your agent have a letter on file that the seller requests buyers get pre-approved with your preferred lender. Some agents might get annoyed by that, but if you sell them on the idea of a quick closing and few issues they will usually play ball. The benefit would be using trusted appraisers who understand the lender's business and can come in with the necessary value.
2. If you are close to having seasoned the property for 90 days and an offer comes in, you can accept the offer and then rewrite it on the 91st day (make sure everyone is on board with this and understands why). Then the lender can order the appraisal and create the FHA case number and the 2nd appraisal should not be required. You may lose a few days, but well worth it.
3. Others have mentioned it, but meet the 2nd appraiser and tell them they are the 2nd appraiser and hand them the 1st appraisers report. Often times when its a query system that is being used to order the appraisals they don't even know they are doing a 2nd appraisal, they just see the order and do their job. Make it easy for them.
4. If one of the appraisals comes in low, ALWAYS ask for a reconsideration of value and TELL THEM how much you need. If its a few thousand it should be a piece of cake. I actually just got an extra $16,000 on an appraisal today. I emailed the appraiser, thanked him for his work and asked what he thought of the attached comps because I was $15,000 away from what I needed. In one day he revised the appraisal and sent it to the lender. May not always work, but might as well ask!
Jennifer Beadles
On paragragh #2, if you are selling the house for more than double what you paid for it, you will still need a second appraisal if the sale is within six months of purchasing. I just went through it.
I agree with everything else you said.
Originally posted by Jennifer Beadles:
2. If you are close to having seasoned the property for 90 days and an offer comes in, you can accept the offer and then rewrite it on the 91st day (make sure everyone is on board with this and understands why). Then the lender can order the appraisal and create the FHA case number and the 2nd appraisal should not be required. You may lose a few days, but well worth it.
FHA will require extra verification of value for up to 180 if the resale price is more than 20% above the purchase price, so the seasoning will generally need to be for 6 months -- not 3 months -- if you want to eliminate that second appraisal.
*Some* underwriters may be able to work around that second appraisal, but in my experience it's necessary about 95% of the time up to 6 months.
Originally posted by Rob K:
On paragragh #2, if you are selling the house for more than double what you paid for it, you will still need a second appraisal if the sale is within six months of purchasing. I just went through it.
It's actually 6 months and 20% above acquisition price (not double acquisition price).
See page 10, condition #2:
http://portal.hud.gov/hudportal/documents/huddoc?id=currentwaiver.pdf
Rob K J Scott: You are right, most lenders will require a 2nd appraisal for that issue, however the lender that I use does not require the 2nd appraisal after the 90 days no matter what the difference in sale prices vs. acquisition. Its been too long since I asked why and how they are able to do that. I'll see if I can get you an answer.
If the time between the last transfer date and the date of the purchase contract are within 91 to 180 days and the appraised value is more than 100% of the previous value, then a full 2nd appraisal is required.This is very common on FHA loans when financing a Quick Turn property from investors.
You don't have to worry that much.Usually the second appraisal will confirm the first one, unless there is a real discrepancy in numbers. In the nutshell, the lender is just looking for a way the have peace of mind when funding a this kind of property.That's all.
Does anyone know if it is the sellers responsibility to pay for the second appraisal?? We bought in September, put on market January and under contract Jan 11. Need 2 appraisals and the lender is saying that FHA requires the seller to pay for the 2nd appraisal. I can't find anywhere it says that the seller MUST pay for the 2nd. Help!!