Unexpected appraisal results

[Renee Ward]

Hello, 1st time posting, though I've been living and breathing allthings Bigger Pockets for the past 6 months.  

My husband and I are new REI, just closed on a 4 plex found off market using seller financing in March, '23.   

We will be  closing on our 2nd purchase this week, also found off market but we will be using conventional financing so an appraisal was required.  It is a single family home with a triplex on the same property sold as a package.  However the appraisal came back only $5000 more than a previous one completed in 2014, on a beautifully kept property.  Market here has been steady, and held stable when the market fell in previous downturns.  

Am I placing too much importance on the appraisal?  It's higher than the purchase price so the bank will have no trouble with it.  I questioned the results and was told investment properties don't gain value like other real estate and that there were no recent comps - they were older than 6 months.  It was an expensive appraisal, costing $2500 so I don't want to repeat it. 

The #s still work, especially since we plan to pass on the the utilites to the renters and will turn one efficiency into a medium term rental in a downtown area near hospitals.  

Any feedback is appreciated.  

[Kevin Sobilo]

@Renee Ward, I think @Melissa Hartvigsen is mostly correct.

Appraisals are an opinion of value. So, there is a subjective nature to them. Also, the appraiser asks for the sales contract. So, they know the goal price you are seeking to make the deal close. That can certainly factor into things unfortunately.

Where I disagree with @Melissa Hartvigsen is that for small multifamily (1-4 units) appraisers do use comparable sales similar to single family homes.

There are 3 ways an appraiser will estimate a property's value. The replacement value which is the cost to rebuild it from the ground up. This is most often used by insurance companies. The income approach which bases value solely on the properties ability to generate income. So, it uses income and expenses to calculate the value. This is most commonly used on commercial properties and those with 5+ units. The final way is the one we are most familiar with and thats the comparable sales approach where recent sales of similar houses are used and then adjusted for the differences and averaged out to create a value.

The appraiser doesn't have to use just one approach though. With small multi-families, they may use both the income approach and the comparable sales approach and then decide which one should have more weight in their final opinion of value.