How to get the most out of BRRRR appraisal?

Question

Hello all,

I currently am under contract for a property that I plan to do some rehab on that will essentially follow the BRRRR method. For those that use the method - how do you get the best appraisal? From the answers I've been able to find, a tenant generally needs to be placed prior to applying for a cash-out refinance. However, I've also read that if the tenants live with clutter, decorate the house in a less than comely manner or make it seem in any way less desirable, it can negatively impact the appraisal. If stuck with such a scenario, is there any way to get the actual deserved appraisal value of the home, or is it just luck of the draw if you end up getting tenants that don't show well?

However, I've also read that if the property is purchased via cash (which mine will be), that delayed financing can be done almost immediately? If that's the case, the answers I found above were in threads regarding BRRRR, which from my understanding assumes you pay for the property in cash, so they might just have confused me about the timing of getting the cash-out refinance.

Thanks in advance for any help clearing this up.

Marcus Auerbach · Answer

@Frederick Tee  you don not need a tenant in place for the appraisal. In fact it's much easier to schedule an appointment when empty. We usually order the appraisal while we are showing the property, by the time the appraisal is done we sign the lease. The lender will require a signed lease before the underwriter signs off on the loan.

I have done a lot of BRRRs in Milwaukee and can tell you from experience there is about +/-5% in variation - same building, same finishes, same block, still different valuations, some surprisingly high, some shockingly low.

Appraisers can be tricky; some are sensitive when you provide too much information and take that as an insult (I know, it's silly). On a purchase appraisal, they have the contract price as a data point and target number - it's essentially a pass/fail evaluation of the purchase price.

With a refi, there is no target number to aim for, so its good to provide that, but just be sure to present it in a way that does not take away the authority of the appraiser, I have had some appraisers that reacted offended (They are also under a lot of legal scrutiny since the 2009 mortgage crisis). You should provide a list and cost of updates and estimated rent if you dont have a lease yet. Those are valuable data points for the appraiser. And then slip some comps in there and a suggested FMV. Your agent can help with that.

And whatever you do, don't look directly at the appraiser lol

John Warren · Answer

@Frederick Tee is this an income property, or is this a single family home that you intend to rent out? If this is a 2-4 unit property, you should probably get some renters in place. If this is a condo or single family then I would get the appraisal as soon as you have the rehab done.

You should also have your agent prepare comps for your appraiser. I do this all the time for clients here in the Chicago market. A lot of times appraisers cover a huge area and don't know the local market as intimately as I do. I have often times been inside the comps they are using and will know things they do not have any way of knowing. This allows me to position the property for my clients in the best light. You should definitely have your realtor do something similar.

Lastly, I think the lending partner you pick out is crucial in all of this. My lender has guided me through several cash out refinances, and we always hit pretty much right at our value.

Whitney Hutten · Answer

@Frederick Tee I try to line up my carry out lending when I'm purchasing the property (that way I know at the same time I can qualify for both loans).  By doing this, when the rehab is about 1-2 weeks out from completion, I call my carry out lender and start the process for the refinance.  This allows me to do the appraisal between the property being complete and tenancy (no messy curtains, or furniture... although that really shouldn't matter).  Then I'm just waiting on a signed lease to execute closing.  So the lender is really your partner in this timing.  Also, that second appraisal is the wild card in the BRRRR process (here's an article to help you navigate it https://www.biggerpockets.com/blog/real-estate-refinancing-success-brrrr-investors).

Frederick Tee · Answer

@Christian Nachtrieb Thanks for the input. Funny you mention that as I literally put that on my priority list a few hours ago as a to do in addition to the needed rehab for the property I'm closing on for that reason.

Christian Nachtrieb · Answer

I think the easiest thing you can do and spend some money on is your curb appeal. The very first thing the appraiser is going to see is the exterior of the building or house. Whether it's a sub-conscience result or not, it's still the first impression they're going to be given of your property, make it a "feel good" moment. Landscaping is cheap. First impressions are everything, spend the couple hundred or a thousand bucks here in my opinion.

Frederick Tee · Answer

@Crystal Smith Thanks so much for that strategy. I've read bits and pieces of everything you mentioned in various places, but it's great to have it all condensed into one post to be easily digestible and for reference.

Crystal Smith · Answer

First off, the appraisal after a rehab has nothing to do with purchasing in cash or with a loan. There’s never a guarantee about the After Repair Value of a property, but here’s how we increase the probability of success for getting the value we want for the ARV. For the most part Appraisers use the same methods as realtors to determine value.  For single family homes or multi families, 4 units or less, they use the comparable approach to determine value. Knowing this before we purchase we review properties that have sold within the past 6 months at the target price we’re seeking for our ARV. When I say review I mean we look at the finishes, the mechanicals, the room sizes, square footage,... and we scope our renovation to match those comparable. We also look at the pending properties.  Whether you plan on selling a property after the renovation or hold it, the appraiser is going to use the same method. When the renovation is complete and it’s time to sell or refinance, we look at the comparable market again before applying for the loan. When we turn in our application for the loan, whether they ask for it or not, we provide our comparable market analysis to support the new value. More often than not the lender will provide the CMA to the appraiser. if it’s a multi family, 5 units and up, most appraisal will use the time income approach. Many will combine the income approach with the comparable approach. To increase the probability that we’ll get the number we want after a renovation we’ll look at properties similar to ours that are getting higher rents and review the features of those properties. This partially determines the scope of work four our renovation. As soon as a renovation is completed or near completion we work to get the units populated, so when it comes time for the refinance we’re providing actual in lieu of a proforma. We provide the comparable and financials when we refinance.

The only time we or clients we’ve represented have had problems with appraisals is when the appraiser could not find enough market data to support the new number. So to remove the “luck of the draw”, your words, you should run the analysis I described above while you’re under contract and once a month until it’s time to refinance. Why once per month? Because the market changes. The comparable you used in the original analysis may become too old to use. New recently sold properties may affect the value.

Frederick Tee · Answer

Thanks everyone for your answers. It definitely clarifies things for me. I'm planning on speaking to some lenders this week or next, but wanted to make sure I was understanding things beforehand. It's a single family home, so I should have no issues there. Though I'm curious - I've seen units of a duplexes and triplexes sold as individual homes. Since they can be sold separately, could you opt to refinance them individually as well?

The list of repairs/updates, comps, and estimated rents are really good tips, and I'll be sure to provide them to the appraiser. And thanks for the link to your article Whitney, it's a good walk-through for what to expect.

I'll keep the not looking at the appraiser in mind, don't want to find out what'll happen if I do haha.

How to get the most out of BRRRR appraisal?

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