My First Offer Appraisal Makes Me Want To Back Out

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My First Offer Appraisal Makes Me Want To Back Out

Maileen Calhoun
New to Real Estate · Central Illinois · Member since 2020 · 13 posts · 12 votes

The purpose of this property was to flip. Here are the specs...

1% Down Payment

FHA Loan Type

Inspection Returned - Nothing unexpected

FHA Appraisal Returned - The appraisal matches the exact offer accepted.

This is my first property so I'm wondering if I should be concerned that the appraisal is the exact amount of the offer accepted. This is a pretty established neighborhood and homes rarely come up for sale.

Is this appraisal matching the offer a concern?

Thanks and Cheers!

Maileen

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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
4y

Well this has been bantered around before....

The appraisal is to essentially 'confirm' the value so the bank is comfortable with the loan they are making. It's based on comps, and the best comp for a property is one that is identical, and sells within the same timeframe. So by definition the best indication of value for that property is whatever you are paying for it. So it's pretty common that the appraisal comes in at that value...they're confirming that you are paying market value.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    Not sure how you got 1% down payment. I think it is rare for the appraisal to come in well below what you offered.  If you offered $500K and it appraised at $450K that would mean you are overpaying and the bank wouldn't lend you anything over $450K.  The appraisals are the banks covering their butts to make sure they aren't lending people $600K on a $400K home.

    1Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    4y

    Well this has been bantered around before....

    The appraisal is to essentially 'confirm' the value so the bank is comfortable with the loan they are making. It's based on comps, and the best comp for a property is one that is identical, and sells within the same timeframe. So by definition the best indication of value for that property is whatever you are paying for it. So it's pretty common that the appraisal comes in at that value...they're confirming that you are paying market value.

    2Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y

    @Maileen Calhoun

    Where did you find a 1% down loan?

    If it's FHA you need to live in the property for a year.

    1Reply
  • Maileen Calhoun
    OP
    New to Real Estate · Central Illinois · Member since 2020 · 13 posts · 12 votes
    4y

    @Theresa Harris I meant 1% earnest. The down payment is 3.5%. Thank you for your input. 

    @Matt Devincenzo Appreciate that! I intend to renovate, live in it for the required amount of time, rent out a room possibly along the way. 

    @Matt M. My apologies. 1% earnest. I'm putting down 3.5% for the FHA down payment.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    4y
    The greatest determinant of value is what a buyer is willing to pay, and what a seller is willing to sell for. So the appraisal will almost always be extremely close to that contract price.
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  • Maileen Calhoun
    OP
    New to Real Estate · Central Illinois · Member since 2020 · 13 posts · 12 votes
    4y

    @Russell Brazil Thank you for your input! 

    0Reply
  • Ley Nezifort
    Rental Property Investor · Brooklyn, NY · Member since 2019 · 106 posts · 47 votes
    4y

    @Maileen Calhoun if I understand correctly, you said this is a flip. So the appraisal you got would include two parts. And ARV appraisal (what the home will be worth after repairs ) and the As-is appraisal. I wouldn't be too concerned with the as-is value if the ARV numbers makes sense. Especially if the as-is is not significantly less than what I'm buying it for.

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  • Maileen Calhoun
    OP
    New to Real Estate · Central Illinois · Member since 2020 · 13 posts · 12 votes
    4y

    @Ley Nezifort Can you expand? I'm still wading through the appraisal report and am stuck on the Market Conditions Addendum to the Appraisal Report section. This neighborhood is established and homes do not go up for sale regularly. So, my ARV estimate is truly based on my own research and pure guesstimation. What on the appraisal should make me consider backing out of the deal?

    Cheers!

    0Reply
  • Ken Nakamura
    Los Angeles CA, USA · Member since 2019 · 7 posts · 5 votes
    4y

    I’m still new so take this with a grain of salt. But your appraisal is an estimation of the current value of your property. 

    What you want to do is understand the future value of your property to predict how much you will potentially lose or gain by owning this property.


    To do this, you need to look back to where things were, and establish a trajectory of where you think things are headed. You said prices are stable in your neighborhood so that’s already one data point and trend you’re seeing.

    The key is coming up with the right combination of data points that allows you to start predicting trends and see a clearer picture over time. this comes not just with research but also experience. You learn from your losses and gains and apply those learnings to improve your outcomes moving forward.

    So an appraisal is a valuation of what your property is with today. A single, starting data point. Look back to historicals to understand how things are trending. Then add in assumptions and data to start projecting whether the value of your property will go up or down looking ahead.

    I’m sure you’re aware of these principles. The key is starting to build out assumptions based on research and MULTIPLE data points, not just this appraisal, and start having a clearer idea or thesis of where you think values are headed. There’s tons of YouTube, podcasts, and blog content out there that tells you how to do this. 


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