Just received a low appraisal on a cash out refinance

15 Replies

I don't know if this is the correct subforum to post this in, but I can re-post it if needed.

To preface, this conversation, I am located in Houston. It's boom time right now in this city, and property values are on fire. I purchased a condo as my primary residence in July of 2013, and I am looking to complete an 80% LTV cash out re-finance. I purchased the property for $254,000 with a 4.125% interest rate. It's a three bedroom, 2.5 bathroom unit with 2,127 square feet. I just received the appraisal back at $305,000 with an offer to re-fi at 3.875% with no closing costs.

What really peeves me is how inaccurate the appraisal is. Two of the comps on the appraisal are for the two units next door to me in the same condo complex that both sold within the past 6 months for $179 a square foot for 1,402 and 1,370 of living space. On top of that, both of these units are 1 bedroom, 1.5 bathroom units. As I stated before, mine came back at $305,000 which places the value at $143 per square foot, but I also have 3 bedrooms and 2.5 bathrooms. How can there be a $36 dollar per square in the appraisal value?

Smaller units Will have a higher $/sf value.  Should yours be 25% lower, I don't know.  I take it there were no recent sales of units similar to yours?

Appraisals can be really annoying. Did the appraisal impact your goal? If not, I would not worry about it right now. If you were to get another appraisal 180 days from now, it will likely look very different. If it did impact your ability to acquire your cash-out-refi, then I would contest it with the lender (they hire the appraiser) and provide them data, not just a complaint. Show them other comps you would have used and share your argument you shared above.

Appraisals are not an exact science unfortunately. They are estimates and the estimate can vary from appraiser to appraiser. It certainly sounds like you have a strong case to appeal  the appraisal to the lender.

And I agree with the post above about smaller properties having a higher price per sf. I have seen that with every comp I have ever done. The smaller condos have a significantly higher price per sf than the bigger ones.

Originally posted by @Andres Piedra :

Appraisals can be really annoying. Did the appraisal impact your goal? If not, I would not worry about it right now. If you were to get another appraisal 180 days from now, it will likely look very different. If it did impact your ability to acquire your cash-out-refi, then I would contest it with the lender (they hire the appraiser) and provide them data, not just a complaint. Show them other comps you would have used and share your argument you shared above.

 If I choose the 80% option at $305,000, I'll be able to cash out $57,000. That's beside the point though. I'm trying to cash out fair value, and this isn't indicative of fair value. To address the latter point you made above, below are the points I made in an email I just sent my lender. I'm going to call him tomorrow to discuss this a bit further:

1) HOA is $347 a month for my unit, not $246. The $246 value if for
the smaller units. Not that this really matters, but it's a
technicality more than anything and probably doesn't have any bearing
on the value.

2) On page two, the report states that the growth for my neighborhood
is stable. It's rapid. If you look outside my window, there is
construction everywhere. Even today, they just broke ground on a
townhome complex across the street from my residence that are prices
at $530,000 for 3/3.5 with 2400 square feet. Look at all of the units
around my complex for sale right now on Zillow. I don't think there is
anything for sale for less than $160/sqft but most are $180+.

3) On page two near the bottom half, the report states that the ratio
of spaces to units is 1:1. This is not true. Units 8 through 12 have
two spots. The rest only have 1.

4) The valuations given on page four are insane. Look at the
adjustment he gives me for square footage relative to #12 and
#13. You're meaning to tell me that 757 square feet of extra living
space is only worth $34,065? That's $45 a square foot. THAT IS
LUDICROUS IN ITSELF. A $6,000 adjustment for two extra bedrooms? And I
mean actual bedrooms. Unit #12 and #13 are lofts and don't even have
complete walls or doors.

5) Look at the fourth comparable on page 8. The appraiser's adjustment for 757
square feet extra of living space is $45 per square foot again. How is
this possible when that unit sold for $157 per square foot, while the
units next door to me sold for $179 a square foot?

6) MORE IMPORTANT THAN ANYTHING, he is assessing the value of my
condominium at approximately $143 a square foot but the lowest cost
per square value sale out of his four comps is at $157. The units that
are physically in my complex should have the most bearing, and even
those are way above the $157 per square foot value of the other two
condos. In other words, I want this guy to explain to me how mine
isn't at $157 per square foot at minimum taking into consideration
that those units outside of my complex are not as nice as mine.

Originally posted by @Fred Heller:

Appraisals are not an exact science unfortunately. They are estimates and the estimate can vary from appraiser to appraiser. It certainly sounds like you have a strong case to appeal the appraisal to the lender.

And I agree with the post above about smaller properties having a higher price per sf. I have seen that with every comp I have ever done. The smaller condos have a significantly higher price per sf than the bigger ones.

Originally posted by @Wayne Brooks:

Smaller units Will have a higher $/sf value. Should yours be 25% lower, I don't know. I take it there were no recent sales of units similar to yours?

Fred and Wayne,

With approximately 800 square feet of additional living space, two extra bedrooms and an additional bathroom, I could understand maybe $20 a square foot lower, but not $143 when those units next door to me sold for $179. I understand the logic of small units having a higher square footage value because that's fairly universal, but this is ridiculous.

What's even worse is that I have actual bedrooms. The units next door to me that sold for $179 per square foot are lofts that don't even have walls or a door.

Hopefully they will see the errors here as well. They vet these appraisers and keep them on their books. Maybe this one should be removed.

It looks like you got a good purchase price, but it may be part of the reason your appraisal is lower than you expect.  It sold for 50K under the appraised value.  

Condo values can be pretty volatile, so the appraiser probably erred on the side of caution.

New construction can help values of existing single family homes, but it can create competition for condos - especially high end condos.

The 3rd bedroom can be very valuable in a SFH or TH. However a good segment of the condo market is singles or couples without kids. A loft may work for a guest room, so the gap could be quite a bit less than you might think.

The appraiser should include at minimum 1 comp that has the same square feet  and 1 comp that has the same bedroom and bathroom count as the subject. These may be from another development if there are none from the subject's development.

The lender will require at least 2 sales from the subject's development regardless of size and bedroom count. That is most likely the reason the 2 smaller comps were used.

If lender is conventional then the appraisal will be reviewed by an Appraisal Management Company. After the AMC decides that they are satisfied with the appraisal they will send to the lender. At that point the lender will review. If they don't have any issues with the appraisal then they will pass to the borrower. Conventional appraisals are reviewed twice.

If you feel there are better comps, then send those to the lender. The lender can send to the appraiser and ask that they review them. Do not contact the appraiser directly. The AMC can construe this as undue influence.

Originally posted by @Jesse T. :

It looks like you got a good purchase price, but it may be part of the reason your appraisal is lower than you expect.  It sold for 50K under the appraised value.  

Condo values can be pretty volatile, so the appraiser probably erred on the side of caution.

New construction can help values of existing single family homes, but it can create competition for condos - especially high end condos.

The 3rd bedroom can be very valuable in a SFH or TH. However a good segment of the condo market is singles or couples without kids. A loft may work for a guest room, so the gap could be quite a bit less than you might think.

 I disagree with the comment regarding the price I purchased the condo at. When I had my condo appraised on 2013, it came in right at $250,000. Comparable comps in the area were right around $120-$130 per square foot for a 3/2 condo. My condo isn't high end, but I would consider it the middle of the pack. The nice ones around here have balconies, crown moldings etc as indicated by the $530,000 asking price for 2200 square feet. 

While I understand the volatility part, Houston is a special because the three story townhome/condo is ubiquitous here. If you live anywhere inside the 610 loop west of downtown, I would bet that 75% of the homes are condos or townhomes. 

Originally posted by @Carlos Hernandez:

The appraiser should include at minimum 1 comp that has the same square feet and 1 comp that has the same bedroom and bathroom count as the subject. These may be from another development if there are none from the subject's development.

The lender will require at least 2 sales from the subject's development regardless of size and bedroom count. That is most likely the reason the 2 smaller comps were used.

If lender is conventional then the appraisal will be reviewed by an Appraisal Management Company. After the AMC decides that they are satisfied with the appraisal they will send to the lender. At that point the lender will review. If they don't have any issues with the appraisal then they will pass to the borrower. Conventional appraisals are reviewed twice.

Carlos,

The reason why a 3/2 in my complex wasn't included was because I have the only 3/2 in my complex. Even then, the comparable square footage 3/2 the appraiser used was a fairly nice unit. Nicer than mine, but the price was adjusted to around $345,000. 

I just don't understand how two recent sales next door to me at $179 won't prop up the value of my unit higher than $143 per square foot. That's a huge difference. 

@Justin Moon  price per square foot is really not the deciding factor when doing an appraisal.  An appraiser will look to see where the neighborhood tops out in terms of total price before ever looking at price per sq/ft and make the adjustment accordingly.  

At the end of the day, the appraiser's goal is to determine the fair value of your condo unit, or what it could sell for if it were to go on the market today by using comparable sales.  I would find it hard to believe that you could actually sell your condo at $179 sq/ft or ~$380K when nothing in the complex has even come close to it.  Your scenario is not only used for condos, but I have seen it a lot in the suburbs of Houston.

Personally, I think he's actually being generous with his appraisal coming in at $305K based on my own experiences.

Medium logo onlyJerry Ta CPA, Propertycare, LLC | [email protected] | (713) 489‑7653 | http://www.propertycarehouston.com | TX Agent # 624354

You're getting really wrapped around the axle about $/sq.ft.  Unfortunately, that's a common error.  You cannot take the $/sq.ft. for smaller units (or houses) and multiple that by the size of yours to get a value.  Once you have the basic infrastructure in place, adding square footage is cheap.  Appraisers know that.  They will take the $/sq.ft for the comps, and use a factor of perhaps one third of that to make the adjustment.  That is, they value those extra square feet at about a third of the $/sq.ft. sales prices of the smaller comps.

The reason why a 3/2 in my complex wasn't included was because I have the only 3/2 in my complex.

Sorry, but this is a serious problem.  Its like the "I have the biggest and nicest house in the neighborhood" effect.  That means on a $/sq.ft. basis your property will be the lowest in the whole project.  Once you exceed the average specification for the project, the added value drops off very rapidly.  

Jon Holdman, Flying Phoenix LLC

This is a great question and thread because I am wondering the same with doing cash out refinances, although with SFH, where it's more likely to have similar comps.

Originally posted by @Jon Holdman :

You're getting really wrapped around the axle about $/sq.ft.  Unfortunately, that's a common error.  You cannot take the $/sq.ft. for smaller units (or houses) and multiple that by the size of yours to get a value.  Once you have the basic infrastructure in place, adding square footage is cheap.  Appraisers know that.  They will take the $/sq.ft for the comps, and use a factor of perhaps one third of that to make the adjustment.  That is, they value those extra square feet at about a third of the $/sq.ft. sales prices of the smaller comps.

The reason why a 3/2 in my complex wasn't included was because I have the only 3/2 in my complex.

Sorry, but this is a serious problem.  Its like the "I have the biggest and nicest house in the neighborhood" effect.  That means on a $/sq.ft. basis your property will be the lowest in the whole project.  Once you exceed the average specification for the project, the added value drops off very rapidly.  

Originally posted by @Jerry Ta:

@Justin Moon price per square foot is really not the deciding factor when doing an appraisal. An appraiser will look to see where the neighborhood tops out in terms of total price before ever looking at price per sq/ft and make the adjustment accordingly.

At the end of the day, the appraiser's goal is to determine the fair value of your condo unit, or what it could sell for if it were to go on the market today by using comparable sales. I would find it hard to believe that you could actually sell your condo at $179 sq/ft or ~$380K when nothing in the complex has even come close to it. Your scenario is not only used for condos, but I have seen it a lot in the suburbs of Houston.

Personally, I think he's actually being generous with his appraisal coming in at $305K based on my own experiences.

Jerry and Jon,

I never said that I was looking for $179 per square foot for my unit. The basis of my argument is that the appraisal was flawed from many angles, and the valuation was not fair compared to what is going on in my neighborhood. I completely understand there is an adjustment factor for square footage, but going from $179 per square foot to $143 is not believable when I have two additional bedrooms, 1 additional bathroom, 757 additional square feet and one additional parking space. 

Look at it this way. I haven't mentioned this in this thread yet, but there were a few additional points that I brought up on my appraisal dispute:

First, there were a total of four comps on my appraisal. Two were for the two units next door at $179 per square foot, one was a 1/1 on the market about 1/4 mile away for $157, and a 3/3 with 2600 square feet that sold recently for $157 per square foot. Explain to me how my appraisal comes in at $143. Using the square foot logic, my unit should be between $157 and $179. 

Secondly, look at the third comp. Why is the appraiser using a 1/1 at $157 per square foot as a comp, when the two units next door to me with a similar footprint sold for $179 per square foot within the past three months? Not only is this unit still on the market, but it should have zero bearing on my property value. 

OK, here's how the appraiser accounted for the extra size.  If you have a copy of the appraisal, you should be able to see the exact adjustments made, so you can compare them to my guesses.

Comp #1, 1402 sq.ft. sold for $251,000 (I'm computing that from the footage and your $179/sq.ft. number).  Its 725 sq.ft. smaller than yours.  I'm guessing at an adjustment factor of $179/3 per sq.ft., so right at $60/sq.ft.  $60 * 725 = $43,200.  Add that to the sold price and I get $294,200 for the adjusted price.  You say yours has two more bed (covered in the size difference), another bath (perhaps +$5000), and another parking spot (no idea on this, but should be on the appraisal.)  So, I get an adjusted value for this comp of $299,200. Numbers are rounded.

Comp #2 1370 sq.ft. sold for $245,200.  757 sq.ft less, times the same $60 adjustment for an adjustment of $45,200.  Add another $5000 for the extra bath and I get an adjusted value of $295,400.  

Regarding comp#2 you wrote:

You're meaning to tell me that 757 square feet of extra living
space is only worth $34,065? That's $45 a square foot. THAT IS
LUDICROUS IN ITSELF. A $6,000 adjustment for two extra bedrooms?

No, that's not ludicrous.  That is exactly how appraisals work.  May not be what you want, but that's exactly what I would have expected.  I came up with a $45,200 adjustment based just one size.  This appraiser is splitting it up between size and walls (bedrooms) and giving you an adjustment of $46,000.

Not enough information to guess about #3.

Comp #4 2600 sq.ft sold for $408,200.  473 sq.ft more, times an adjustment of about $52/sq.ft is an adjustment downward of $24,800.  That gets to $383,400.  Would be an adjustment for the bath, too, downard in this case.  Must have been some other adjustments, too.  Again, they would be on the appraisal.

Appraisals do typically include both sold properties and current listings.

Sorry this isn't working out like you hoped.  But the information you've given is consistent with how appraisal really work.

Appraisals are always a crap shoot.  You never know which comps the appraiser will choose.  They may well choose different ones than you would.  Did you meet with the appraiser?  Did you give them a list of comps?  Did you tell him about the work you did on the place (if any?)

Jon Holdman, Flying Phoenix LLC

Unfortunately, the only way to truly know for a fact the market value of a property is to put it up for sale and see what someone will pay. 

And really, until that sale happens the amount of equity anyone has is just a matter of opinion.  Equity is great, but it's not "real money" until you sell. A lot of us learned that the hard way in 2008.

Medium team zen logo vJean Bolger, 33 Zen Lane | http://www.solidrealestateadvice.com

@Justin Moon  Your argument is with the appraiser, I was just merely giving my opinion.

Again you're still trying to argue the price per sq/ft without considering total price, which is my main point.  Your home at $157 per sq/ft would be priced at ~$333K, do you really think you would be able to sell for $333K?  

Medium logo onlyJerry Ta CPA, Propertycare, LLC | [email protected] | (713) 489‑7653 | http://www.propertycarehouston.com | TX Agent # 624354

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you