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Appraisals: High or Low, They’re Still Disappointing

by Marty Boardman on January 5, 2013 · 18 comments

  
Arizona Real Estate

Dateline: Pasadena, California, The Rose Bowl, January 1997

My beloved Arizona State University Sun Devils football team had a 17-14 lead with 1:19 left in the fourth quarter of a back and forth game. A share of the national championship was on the line. All they had to do was make one defensive stop and the game was over. Unfortunately, the Ohio State Buckeyes marched the length of the field and scored a game-winning touchdown in the north end zone.

I will never forget that day.

As a cameraman for the CBS affiliate in Phoenix, I covered Arizona State’s pre-season training camp and several of their regular season games. I roamed the sidelines with a 40 lb. camera on my shoulder capturing highlights for our local newscasts.

I was in Corvallis, Oregon when JR Redmond returned a punt for a touchdown. I watched the Sun Devils dismantle Nebraska, the number one ranked team in the country. And when ASU clinched the Rose Bowl birth I sat in a bar perched above Mill Avenue as fans, in celebratory glee, carried the goal posts down the street.

But the good times would end in southern California.

My last memory of the season is David Boston, a wide receiver for Ohio State, catching a touchdown pass right in front me. It was the only touchdown scored on that side of the field that day – the side of the field I was required to stay on. It was also the last touchdown scored that day. Yes, it was the game-winning touchdown.

16 years have passed since the loss. I still loathe those Ohio State Buckeyes. Their fans too. What a disappointing loss.

College Football and Appraisals

My football team has let me down plenty of times since the 1997 Rose Bowl.  Disappointment comes with the territory when you’re a college football fan. It’s also part of life as a fix and flip real estate investor, especially when it comes to appraisals. Whether lower than contract price, or higher, they can be painful.

Here are two examples:

Last fall, I had a property under contract for $259,000 with an FHA buyer. The lender required two appraisals. The first came back at $248,000. So guess what? The buyer asked me to lower the sales price, which I did (after getting the buyer to agree to pay for their own closing costs to offset some of the hit). Then the second appraisal came back – at $253,000. Do you think the buyer or their lender would honor the higher of the two because the original contract was for $259,000? Of course not!

A few weeks ago I put a home in south Phoenix under contract for $250,000. This time the appraisal came back at $255,000. Do you think the buyer or their lender would pay the difference between the contract price and the appraised value? I mean that’s what they would expect me to do if the appraisal came in low right? No way!

As a fix and flip investor, this twisted logic buyers and their Realtors have about the transaction drives me crazy. What’s worse, as a seller there’s really not much I can do about it. However, it’s still not as bad as my team losing a game with a last second score.

Did I mention I can’t stand the Ohio State Buckeyes football team?

Neon Tommy

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{ 18 comments… read them below or add one }

Phil January 5, 2013 at 11:05 am

I live in Hampton Roads area of VA. Just flipped a starter home at 121k and ended up selling for 115k because the appraisal came in low. Lost 6k even though we had 5 offers on the home all above our asking price.

I’m an OSU football fan and things are looking up for us as far as football is concerned. Go Buckeyes! I remember that game!

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Marty Boardman January 5, 2013 at 12:55 pm

Thank you Phil for making me feel bad. Twice. Once about your low appraisal and secondly with those awful Buckeyes. A bad appraisal can submarine profit instantaneously.

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Greg Turnquist January 5, 2013 at 12:12 pm

Sometimes this aspect of appraisals really perplexes me. If there are five offers on the table, all being at or above the minimum price, why should the appraisal count? I understand the bank being able to say it won’t lend any more than the appraised amount, but shouldn’t it be an option for any of the buyers to pay the difference?

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Marty Boardman January 5, 2013 at 12:57 pm

Greg, it’s always an option to ask the buyer to pay the difference. But as Phil pointed out, most FHA and VA buyers have no spare cash to make it up. I’ve found there’s some psychology going on here too. Buyers are afraid to pay more than appraised value, even if they were comfortable with their purchase offer in the first place.

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Joshua Dorkin January 5, 2013 at 1:15 pm

I’m with you on this one, Greg. If you have multiple offers above that price, the value of the house is now by definition, at least that price.

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Phil January 5, 2013 at 1:17 pm

If that were the case I’d have gotten my negotiated price. I have been using this bank quite often but this has put a bad taste in my mouth.

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Phil January 5, 2013 at 12:29 pm

For me it was a matter of getting the place closed as soon as possible to move on. My buyer is a VA buyer and has no cash in bank account. Buyer has maxed out what buyer is able to pay for a mortgage. Sure I could have demanded my buyer pay the difference but buyer unable to pay due to recent divorce. Due to 45 day closings and longer is too long to start over. The deal would have fallen trough if I were to ask for $500 more in cash so I bit the bullet and have moved on. Lesson learned: DO comps pre-purchase and then move as fast as possible. Bank wants 3 month or newer comps.

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Marty Boardman January 5, 2013 at 12:58 pm

Smart move Phil. Get it closed quick and move on to the next deal. Live to fight another day.

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Phil January 5, 2013 at 1:02 pm

Thanks! I wish that I would have used the lower price to negotiate a little bit in my favor such as an “as is, where is” addendum but I didn’t. I had a very clean home inspection with just 2 small things to fix. My frig’s ice maker is not working and I would have liked to have to not deal with it. Oh-well!

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Marty Boardman January 5, 2013 at 1:07 pm

When they come back low I usually try that too – as-is, no closing costs.

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Glenn Espinosa January 5, 2013 at 6:31 pm

Great post Marty!

I, fortunately, have yet to be hit with the low end of an appraisal.

Phil, I too live in Hampton Roads. Your post worries me.

I know talking to the appraiser beforehand and even preparing a marketing package that helps justify your ARV is a good strategy for getting the number you want. Anybody have any other tips?

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Michael January 7, 2013 at 5:32 pm

Hey Marty –
You are right as it isn’t fair. I recently had a property sold and the appraisal came in higher & all was set you would think when the bank decided they wanted another appraisal & this one came in lower and the 2 averaged would of still been higher the sale price. They only used the lower appraisal & almost killed the deal. The 2 agents involved decided to split the difference that was about $2,000 & the owner kicked in $1000 out of their commission because they wanted it to close. I did some extra work for the buyer & everything closed. Absolutely insane what some of these big banks put us all through. At least I know I am not alone now. LOL.
Still love what I am doing and I am sure like you we get better & anticipate more on every deal.

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steve January 8, 2013 at 5:39 am

I had a deal almost fall through too. Living in a small town (in Michigan at that), which doesn’t give a lot of true comps anyway. The comps were few and far away and were not apples to apples. The only good thing was that I picked up the house at a great steal so we still made money. As Michigan fan, I will always cheer for anyone who plays that team from Ohio. You’re right too, the fans are the worst. Present company excluded of course. Thanks for the post.

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Ryan Lundquist January 8, 2013 at 7:39 am

I’m not turning a blind eye to the reality of low appraisals, but at the same time there are definitely reasons why buyers would offer more than a house is worth. In a market with ample inventory, we’d probably see these things less, but in today’s market things are a bit whacky to say the least (in Sacramento anyway). For instance, if inventory is incredibly low like it is right now, buyers might all offer at a higher price simply to avoid being the lowest offer and miss out altogether. At times appraisers might really botch a value, but other times properties are simply overpriced. It’s interesting to regularly hear from loan officers and agents things like, “yeah, we didn’t think it would appraise that high” after an appraisal comes in “low.” Also, FHA buyers tend to offer higher than conventional (in my market at least). Additionally, there is so much cash in the market right now that it’s really driving up offers. Sometimes offers simply get too high to what I call the “smoking crack” level. In fact, this is why some sellers have seemingly not been selecting the highest offer sometimes because they know it’ll never appraise that high. I also know agents and investors who have listed properties higher as a strategy to attract hedge funds buyers who will overpay because they can.

Again, I’m not minimizing bad appraisals or the pain of losing money. That’s terrible and I’m truly sorry to hear that. The two appraisals being required on flips really doesn’t make it easy to say the least. I’m just saying it’s complicated to interpret the market because there are always many factors to consider – even when there are multiple offers.

Any thoughts?

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Greg Turnquist January 8, 2013 at 8:49 am

“At times appraisers might really botch a value, but other times properties are simply overpriced.”

I feel like my definition of overpriced and other’s definition may be different. Overpriced to me usually means, I won’t buy it!

For others, I think it’s more like more than they wish they had to pay for it. By that definition, EVERYTHING is overpriced, because we all wish we could get something cheaper.

But there is a HUGE mansion near where I live that has been overpriced for over 2 years. That’s because it’s still listed for sale, and we have been driving by it everyday since 2010.

Of course, if you are receiving any type of assistance, then you may offer more because after all, it’s not all your money, right? I can understand restraining things in that convention. But the more players involved in the decision of what is under/over/fairly priced, the more warped these economic decisions seem to get.

Despite all this, I sometimes feel appraisers are still sort making an educated guess, driven by what sold in the past six months (or less). And yet we are forced to hold it up as the definition of market price. If everyone was paying cash and not using financing, then this would be drastically different and their influence on sales greatly diminished. But I guess that’s the game we play. The fact that these appraisals will inhibit the maximum amount of repairs people will put into a property, not wanting to make it too expensive, is kind of sad.

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Ryan Lundquist January 8, 2013 at 9:03 am

Thanks Greg. Speaking of definitions, it might be helpful to post the definition of market value found in appraisal reports. This is what appraisers are aiming for (or should be). Whether that is achieved or not is another question.

“Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

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Julie Oldham January 9, 2013 at 8:24 am

What really bothers me about all of this is that when the appraiser does the appraisal INCORRECTLY, there is really no viable, practical, realistic recourse for the seller. I did a flip last spring, received a fabulous offer on my little $150k house from a conventional buyer within days of listing it. My realtor and I had studied appropriate comps extensively before I even purchased this house, my margins weren’t wonderful, but definitely worth my time. Then the appraisal came back. Ouch. Instead of using comps from homes identical (and I mean identical! same exact houses!) and close to mine, he went outside of the neighborhood and chose homes that were so different, we thought we’d gotten back the wrong paperwork. What were my options? Not sure if this varies by state, but here in Colorado, if you want to dispute an appraisal, you file your objections with the lender that ordered the appraisal. If by some stoke of miraculous good luck the lender agrees with you (and ours actually did!), then the appraisal goes back to THE APPRAISER THAT MESSED UP IN THE FIRST PLACE. Yep, you get to tell the guy that did the work he’s an idiot, hope that he admits this, and goes back and fixes his mistakes. What are the chances of that happening? And with this process, it takes several weeks just to get the dispute back to the original appraiser. No way my buyer was going to wait through all of this nonsense, she was off looking at her second choice house again. I had no choice, really, but to lower the price for her to what it appraised for, costing me half of my profit on this property. Sure, I could have let the deal go, put the house back on the market, wait for another offer, go through the weeks of waiting for another lender ordered appraisal, hope this next one actually had a clue… with the possibility of getting yet another bad appraisal. The system is broken.

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Ryan Lundquist January 9, 2013 at 9:14 am

That’s a real bummer. I’m sorry to hear that. I’ve seen similar things from investor clients who call me and want me to critique appraisals they get so they can in turn help challenge the appraisal. In some cases the appraiser will change the report if there was a big error, but in many cases there is no change. I was particularly disappointed in a recent duplex appraisal I saw that was valued about 10% too low. The appraisal was really bad and there were so many reasons why the value should have been changed. Yet the AMC did not budge after a very solid critique was put together. You’re right about having to lower the price or just move on to a different buyer. It is a tedious process. Fortunately for my client he has multiple buyers lined up waiting to purchase the property at the higher level, but obviously that doesn’t always happen.

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