Low appraisal - BRRrR Strategy challenge...

11 Replies

Hey guys!

I recently bought a 4-plex of townhomes for $130k.  It was grossing about $1750/mo and fit all my criteria, and overall looked like a great deal, so I moved forward with the purchase.

My strategy so far has been following the BRRRR strategy of buying a property cash, fix it up if/as needed, get tenants in, and get a traditional mortgage on it. Usually they'll appraise for a bit over what I purchased so I can essentially get all my cash back out of it and do it all over again.

Well this property just appraised for $98k, so the most I can get out of it is right around $80k, meaning I have to leave $50k of cash in it!  Not cool!  Granted this means my payment will be a bit lower so I can essentially pay it off quicker, but it really puts a damper on things.

Have you all dealt with a low appraisal?  Are there ways of getting better appraisals, or other ways of getting my cash back out of it?

Thanks in advance!

Joel

Do the comps support the $130k you were hoping to get?

What do you think the properties are worth? $98,000 sounds cheap for a 4plex. Is it possible the appraiser used bad comps or didn't take the rehab into account? You could argue with the appraiser or ask the bank to hire a new appraiser (we were able to do this once by showing the first appraisals to be junk). If you're really convinced this appraisal is bad, but the bank won't budge, you could try to get the loan with another bank and just go through the whole process again. 

Appraisals are a bit of a wildcard in the buy and hold game, that's for sure.

I don't know if your appraisal is inaccurate, but I expect this is a common problem with the brrr approach.

Lenders typically have an appeal process in place if you do not agree with the appraised value. This involves providing comparables that are more similar to the subject property than ones within the original report. Did you have an appraisal completed with the initial purchase?

Appraisers computer program is only as good as the units he puts in as comps. When I bought my primary residence... house on a lake... he used some of the attached condo townhouses across the lake as straight comps. and gave me a value that if it was on MLS for that I would have people with duffle bags of cash at my door. it was a joke. I pissed and moaned, threatened to just get a new loan somewhere else blah blah.. they eventually asked me for who my appraiser of choice was, I got a name of a real person with a brain in my town, they ordered one from her... problem solved.

Either you overpaid, or the appraiser is a tool.  worth $300 to get a new appraisal done..

Wow @Carson Wilcox , is that what they charge in CA for an appraisal? The last couple I've done for refis or purchases were $600-800 out here in the Puget Sound area!

Best option is to dispute the appraisal. Provide your own comps that justify the price you're looking for. If you need to you can have a realtor do a CMA and use that as a base. When you dispute also include why the comps the original appraiser used were not accurate comps. Provide all of this information to the bank in a professional way, and worse comes to worse, you have to go to another bank. If you do get a new appraisal, when the appraiser shows up give them your CMA analysis and in a tactful way hint that you've done your work and know what it should be worth.

@Joel Palmer , if "they'll appraise for a bit over what I purchased", how does that translate into "so I can essentially get all my cash back"? 

ie. Afaik, they'd need to appraise at 143% more than your input, for that to happen!

ie. The 70% Rule. [All-in at $100k needs an appraisal of $143k to get all your cash back].

ie. Which Lender is letting you refi a lot more than 70% of their appraisal? Cheers...

Originally posted by @Joel Palmer :

Hey guys!

I recently bought a 4-plex of townhomes for $130k.  It was grossing about $1750/mo and fit all my criteria, and overall looked like a great deal, so I moved forward with the purchase.

My strategy so far has been following the BRRRR strategy of buying a property cash, fix it up if/as needed, get tenants in, and get a traditional mortgage on it. Usually they'll appraise for a bit over what I purchased so I can essentially get all my cash back out of it and do it all over again.

Well this property just appraised for $98k, so the most I can get out of it is right around $80k, meaning I have to leave $50k of cash in it!  Not cool!  Granted this means my payment will be a bit lower so I can essentially pay it off quicker, but it really puts a damper on things.

Have you all dealt with a low appraisal?  Are there ways of getting better appraisals, or other ways of getting my cash back out of it?

Thanks in advance!

Joel

HI Joel, 

The biggest issue with BRRR strategy is the exit post rehab appraisal. We should all focus more on the exit than on the entry into the deal. I see lower appraisals all the time and there are strategies or things to look out for when planning the value on the exit.

I always make sure to look up some crucial factors when I do BRRR's:

- how many active comparables do I have on the market (these will be my potential comps after my rehab possibly...)

- how many pending comparables do I have on the market (these will very likely by my comps for my appraisal post rehab)

- how many days does it take an active to go to contract (can affect the marketing strategy you employ if selling, the amount of price reductions if selling, competition, and over all charts the value of where your property value will be 3-4 months down the line)

- What constitutes a comparable? Sometimes titles will be given like " 4 plex of town homes," but the reality is appraisal and appraisal techniques follow a uniform process and yes there is art to it but there are guidelines just like in the lending business (DTI ratios, LTV's, seasoning periods, etc/etc).

Could it be possible that those town homes are 4 individual APN# (assessors parcel numbers) ? This could vastly affect the value of your appraisal as opposed to being a true fourplex which is 4 units sitting on a conforming lot zoned for 4 units with one tax APN#. The appraiser has to go out to find comps similar to yours within 1/4, 1/2, 3/4, and 1 Mile and there are procedures they must use if they want to expand their search from 1/4 to 1/2 and so on plus explanations they must make in order to justify doing so. This means that the less comparables available or the more obscure your comparables are then the more "work," the appraiser has to do to reach their ultimate opinion of value. These appraisers do not make more money just because there is more work to do so they are incentivized to do a volume of business and not take precise detail in obtaining an exact science of a value for you. Sometimes they will just rush a value through only to know that they will probably have to deal with you rebutting the value down the line (process of contesting the value).

Hope that helps, as always plan accordingly. If you dont know what to plan for or who can help ask your lender or on BP there are resources everywhere. The above is from the day to day trenches of ordering hundreds of appraisals and originating mortgages and doing my own loans as well.

Originally posted by @Tyler Blackwell :

Wow @Carson Wilcox , is that what they charge in CA for an appraisal? The last couple I've done for refis or purchases were $600-800 out here in the Puget Sound area!

 Yeah Tyler different areas have different demand. In the PNW post 2008 appraisal pay hovered around 425-475 for a very long time. It was not till 2015 that appraisal demand from people buying and refinancing exceeded supply.

Prices for appraisals in the PNW rose sharply and are now in the 575-625 range for 1 unit primary residence appraisals. I think the average my borrowers are paying and to even get an appraiser to take the assignment without balking at it is around $600 dollars.

Keep in mind this is for 1 unit primary residence. As soon as you go to 2, 3, 4unit properties you're looking at 750-1050 dollars plus if you're doing a rental property and are required to do a rental property survey (AKA form 1007 for the loan officers out there) then thats another 125-150 dollars.

This assumes you dont have any repairs (double strapped water heaters, health/safey repairs, CO/Smoke Detectors, being most common). If you do have repair conditions on your appraisal you will have to order a reinspection which is another 125 dollars or so.

This is the reality of the PNW market from snohomish down to Pierce and possibly Thurston (I dont do many Thurston county loans but it seems similar).

On the other hand in LA to SD counties where my other 40% of my loans are at the appraisal for 1 unit SFR primary residence is around 450-475 so its a lot less quite simply because there are a lot more appraisers relative to demand so the pricing is more dampened.

Hope that helps.

Same thing happened to me as well, I had a 4 unit building appraise for $160k but the comps suggested a $250k rate. I have not had an appraisal issue with SFH, however the multi unit caused a disaster. You can use a different bank and attempt to refi with someone else and get another appraisal.

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