Low Appraisal on our first BRRR

16 Replies

NOTE: this is our first BRRR!!!

Purchase details: 

Duplex in Jefferson County NY, originally listed as 3 bed/1 bath on each side. 1 side was rehabbed and occupied by previous owner, 2nd side was essentially gutted (with one of the bedrooms removed), didn't have any plumbing and was down to the sub floor in most places. Purchase price: $68k. Funding: "Fix n Flip" hard money loan with a $20k rehab baked into the loan. 12% APR with the payment being 1% of the loan each month. Closed 12/21/18, 13 month loan term. Closing costs + downpayment was about $17k (funded by a HELOC on our primary), loan amount $78k. LTV 70%, ARV expected $110K (with the scope of work identified as only inside the property). We purchased through an LLC.

Rehab details:

Created a kitchen on the unfinished side: new flooring, new appliances, new cabinets, new plumbing, new electrical, new countertops. Created a bathroom: built walls, new flooring, new plumbing, installed a bathtub w shower, toilet, vanity. Reconfigured bedroom layout so each was accessible from a hallway (had to enter the master through another bedroom when we purchased the property), laid new carpet throughout bedrooms and hallway, created walk in closet in master. Replaced a few windows. Replaced all the siding on the entire property. Painted numerous rooms. Total rehab about $27k. New configuration - Apartment A: 2 bed 1 bath, Apartment B: 3 bed 2 bath. 

Refinance:

Starting the refinance process. Assessment just came back today at $100k. We were expecting at least $130k. Comps used didn't have any improvements. LTV of refi loan 80%.

My question: 

What are our options? Not likely to be able to sell by end of year. Trying to figure out what to do here. Do we continue with the refi, pay off the fix n flip loan and simply not pay myself back for the downpayment etc? Apartments are currently listed for rent but both sides are vacant. Expecting $2100 in monthly rental income (assessment estimated more like $1600 based on the comps they used). 

We are newbies and this is our first deal, looking for any advise you can offer. Many thanks!

Originally posted by @Brandon Sturgill :

@Kimberly Smith This deal was doomed from inception...not a good use of the BRRRR strategy....the math never worked and the acquisition strategy was flawed. Try to escape with your life and take to heart the lesson. Sorry...

This response does't tell me anything. Why? Please elaborate. 

You have enough to pay the hml. Yes you have money in the deal, but that happens sometimes if your numbers are not right. I would dispute the appraisal if you are sure they are wrong but guessing they are not based on your comment on comps not being updated. You are supposed to buy below market and the upgrades get you to market. Most upgrades don’t get you above market.

@Kimberly Smith I see folks in this situation a lot...the BRRRR technique is really a cash acquisition strategy...for it to work correctly you should be around 50% of ARV going in...maybe 60%...and your renovation needs to be very conservative...no full scale renos...too risky. You have to remember that the LTV on the re-fi is going to be at 70%LTV and conservative...

BRRRR really isn't that great unless you have a screaming deal...most folks that BRRRR with a lender involved get screwed when they have huge renos or unexpected costs with the combination of being incorrect on the ARV...it's really a pretty advanced technique...and there are very few places in the country where you can find deals to make BRRRR worthwhile....sometimes economic condition may create a good BRRRR climate, but those days are passed...

@Kimberly Smith I agree with @Brandon Sturgill but with all logistics aside and just focusing on the appraisal, you can request a reconsideration of value. Some appraisers suck and write off any comps you provide them as crap (even if theyre good) or occassionally you do get the appraiser that says oh crap these comps totally work better. Worth a shot, it doesnt cost ya anything except an email to the lender.

Keep in mind comp criteria though. Seriously dont send in comps from over a year ago or out in distance (unless youre in a rural/complicated area). Also a good idea to provide a list of improvements with it.

@Kimberly Smith Your numbers on this BRRR are very out of whack ... that I can agree with others on. However, you have options left to explore. I wrote a post about this very thing last week.  You can switch conventional lenders, switch to a commercial lender, leave more cash in, sell (have you checked out Roofstock?), flip to another investor... All is not lost, though this will be a big learning lesson I'm sure.  As far as your next deal,  I disagree that a BRRR is a super complex transaction, however, partner up with someone who has done it before so you can what a good deal looks like.  Feel free to PM me if you like.

Reminder to lurkers that a lot of the older BRRR podcasts/articles/blogs/etc overstate the ease of the refinance portion, in particular the appraisal part of the refinance portion.

Appraisers these days have an "obligation to analyze" the "sales history of the subject property." That analysis can certainly include the fact that it was a distressed sale of a property too beat up to be traditionally financed -- did you hand the appraiser your "before" pictures? They can't analyze data that they don't have. :)

Those are amazing rent numbers on a property that is < $100K.  But it depends on your end game. If you are not interested in being a landlord then sell it and move on.  Less learned, experienced gained.  #2 should be better.

Scott

@Kimberly Smith did you HML not require an appraisal? most HML will have an appraiser check out the property and tell you what it would appraise for after the repairs are done.

Did it just come in much lower now that the repairs are done?

I have found disputing the appraisal to be useless and a waste of your time, but YMMV. In this case, the rents look really good though, so why not refi, pay off the HML, and payback your heloc with the cashflow. Basically you have 24k in a deal that should cashflow 1k+ a month assuming your rent estimates hold true, which is amazing. you can use the income to pay down the heloc faster, and use the heloc as the reserve, then build up the reserve after the heloc is paid off, instead of building it up first. You might just have to push out the final "R" a bit is all. Plus if a sell opportunity comes along you could then just sell it and go to the next one.

@Kimberly Smith I'm late to the party here but I have a couple suggestions. You said that you're expecting $2100 in monthly rental income whereas the assessment estimated more like $1600 based on the comps they used. If you have time on your HML, put renters in asap. If you can secure $2100/mo then go back and present your rental actuals and ARV comps (6 - 12 mo, within a mile, same neighborhood, etc) and ask for them to re-evaluate the appraisal.

You could also shop the refi with a different lender.

If neither of those are an option then I'd agree with @Joseph Walsh that you should be able to cashflow the $20k or so funds left in the property after the low appraisal.

Quick update for anyone wondering whatever happened with our poor appraisal. I ended up going back to the hard money lender that we have our current loan with, and they have a 30 year fixed option, so we are in the process of refinancing through them. Appraisal came back today at $140,000 (same appraiser as the one used when we purchased the property originally)!! I am glad I didn't take that $100k without a fight! Much better with $140! Some extra stress, time, and effort, but it looks like it's working out in the end! One unit is rented and the other has had some traffic but no takers just yet. The property is 10 minutes from an army base, which just had their "largest deployment since 2003" from what the local newspaper said, so we are seeing a lot of competition in the market right now. I am sure it will work out.