Option$ when your flip does not appraise to your agreed price

7 Replies

Hey BP! I am just about finished with my first flip. We made SO many mistakes (budget blown, took way too long), but the end result is a beautiful house in an up and coming neighborhood in New Jersey. We have a buyer and an agreed upon sales price. We're about to get everything moving and I have a suspicion that the house is not going to appraise for the agreed upon price. I don't want to abandon the deal, so I'm considering my options. I need to pay back my hard money lender asap, so was considering holding a portion of the note so the sale can still happen. Has anyone done this when there is a traditional mortgage involved? I imagine a lender would not be very enthusiastic about me holding a small note on the property, but wondering if anyone has dealt with a similar scenario before? 

I was also considering refi-ing the property, renting it for 2-3 years and then selling at a higher price. It is in a neighborhood that will be trending upward for the foreseeable future, but I would prefer to sell so I can invest in other areas. 

Thank you for any insights! 

Nick,

FSBO or did you have an agent? If you had an agent (that listed your property), then they should have done a comparative market analysis. If you have that, and the comparable sales are less than 12 months old, then have the agent present them to the appraiser, and explain how they arrived at the value.

If you didn't have an agent, then you should consider showing the appraiser how you got your ARV. Again, your sold comparables should be under 12 months. Re-run your ARV using the newest sales information, and give those to the appraiser.

In the future, consider bringing your local appraisers into your network. Not only can they be a lifesaver if you need help understanding what is happening in a market, they can be a valuable ally when you have those top of the market deals. 

I would find out who is the biggest lenders are in the area, and who they use for appraisers. Then make business connections with the mortgage brokers, and appraisers. When you have a buyer, give them a list with your favorite mortgage broker at the top (you can even have the mortgage broker do promotional materials for you with both names on them, usually for no cost). 

You may suggest to your buyer that the list you have given them contains the best, easiest to work with, most professional lenders in the area. Offer to make the appointment for them, if they would like, and ask them what would be a good time. Then call/text whichever one they choose and set the appointment. Then have your mortgage broker (if possible, ask nicely) use your appraiser business associate. The appraiser can't make a 100K property worth 200K (well, not usually), but if you want to be in more control of your deals, this is one way you can.

Another option (for this deal, worth a shot) is to ask some agents who the best appraiser (most liberal/friendly) is, and see if the buyers mortgage company will use that appraiser, and then feed him your sales comparables.

Hope this helps.

Good Luck!

Jim

a refi isn't really going to help you out.  If you have 100k into it and it only appraised for 95 than you are short that 5k.  If you go to refi you won't get that 95k, you will get 75%-80% of that 95k. That's 71,250 to 76,000.   If you can't come up with the 5k to sell to this buyer than i don't see how your going to come up with the 24k with a refi.  

I think it will probably appraise fine.   Finding contingencies is always a good idea but I would try not to stress to much. 

I had a house not appraise. Listed at $320,000 thinking we needed some time to move to NY do list high, and it will sell probably around $300,000. Ended up selling one day 1 with numerous other interested parties (I.E. probably worth $320,000).

Appraisal came back at $295,000... oops! We did our homework and found that all of the solid comps we had were just slightly too far away (same town, just a ways away) and this hurt the value. Ended up the best comparable appraisal/CMA right at $300,000.

We ended up agreeing to $310,000 as the buyer loved the house and came up with the extra money. Don't immediately panic. If you have time before the appraisal get your conparables as best you can and have them in hand for the appraisal. If it doesn't appraise, speak with the realtor, do not let them tell you you have to sell at the lower value. 

Your in a better position being before the appraisal than I was. Just run your comps now, and see what they tell you.

First of all, your agents shoud be helping you with the appraisal process (give you an idea of the comps, work with an appraiser to make sure the appraisal comes in as expected etc)

Second, even if the appraisal comes in lower, your buyer might still be able to bring more cash to closing and be able to close. Another words, this  event would trigger another round of negotiation. Again, your agent would be instrumental in navigating this with your buyer (or with the buyer's agent).

Make sure you meet the appraiser there and have a packet of information showing comparable sales, how you arrived at your sales price, and a list of major improvements.  I never push it on them, just state something like, I'm sure you don't even look at these, but this is how we determined the sales price.  Many times, they are happy to take it from you.  The only time I had a house appraise too low was when I was selling an out of state rental, not able to make it back in town before the appraiser scheduled so I couldn't even leave a packet of information there, and the idiot ignored good comps near mine and instead used ones almost a mile away right next to public housing.  And he wouldn't change it.  Luckily, the buyer agreed to reduce the seller concessions and we split the $5K difference.   Now, as soon as we're under contract, I make up a packet of information and leave it on the kitchen counter marked "Appraiser" in case I'm not available when they come.   

Its not a problem , till an appraisal is done 

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