Full-Offer Contract Signed, But Issue w/ Appraisal! Help!

11 Replies

Hello,

I recently completed my first flip in Northern NJ. I bought the place for 125k, spent about 65k into it, with 10k more in miscellaneous & holding costs. I listed it for 289k and got multiple full offers the first day on the market. I went forward and signed a contract with a buyer through bank financing. Everything went well thus far, they did the home inspection and we agreed to do all the minor touchups and stuff on the report. They did an oil tank sweep and there was no tank residue or history, so that was a plus. Everything went well until yesterday 6/18 when we got the appraisal back. It came back at 270k, with another appraisal the bank got at 265k. Both these are severely low, as there are similar houses on the same street w/ no garage & that still needed work done for 265k. Also, we converted the attic to a 3rd bedroom, but both appraisals only list them as 2 bed (not sure what the FHA laws are regarding SFH and attic bedrooms.) We want to dispute the appraisal but want to know the best way to do so. Apparently, with bank financing, the seller's aren't allowed to bring their own appraisers. Could someone please advise who has experience in a situation like this? Thanks so much!

@Vishesh Shah --

You're in a tough spot, especially because it's FHA.

My understanding is that an FHA appraisal sticks with the property for a certain period of time, so even if you found another buyer, the previous appraisal would still be on record and tied to the property assuming they were also an FHA buyer.

You can certainly appeal it, though I'm not sure what the timeline will look like. How did the 2nd appraisal come about?

Regarding the 3rd bedroom, my guess is that that's having a significant impact on the value from the appraiser's perspective. Are there any qualities that would preclude the inspector from considering it a full bedroom (closet, private entry door, etc.)? Were any permits pulled? Did you get a CO from the town that notes a bedroom count?

Good luck,

Ryan

Originally posted by @Ryan Goldfarb :

@Vishesh Shah--

You're in a tough spot, especially because it's FHA.

My understanding is that an FHA appraisal sticks with the property for a certain period of time, so even if you found another buyer, the previous appraisal would still be on record and tied to the property assuming they were also an FHA buyer.

You can certainly appeal it, though I'm not sure what the timeline will look like. How did the 2nd appraisal come about?

Regarding the 3rd bedroom, my guess is that that's having a significant impact on the value from the appraiser's perspective. Are there any qualities that would preclude the inspector from considering it a full bedroom (closet, private entry door, etc.)? Were any permits pulled? Did you get a CO from the town that notes a bedroom count?

Good luck,

Ryan

 Hi Ryan, Thanks for your quick reply! The thing that annoyed me is that both appraisals were said to be done on 6/5/18, just a few days before we agreed to do everything on the punch-list, but the buyer's attorney didn't even send them to us until yesterday 6/18/18, more than 2 weeks later! That pissed me off since it seemed like they were trying to low-ball us. Especially since the appraisers weren't really from the area of where my property is (Englewood). The 2nd appraisal was apparently done simultaneously as the first one, as they both had the same date on them. I don't believe there is a CO yet that states bedroom count, however, I had a buddy of mine run tax records and this property was always deemed a 3 bedroom he said. That is literally the difference between 265k and 300k. 

If you feel you can make a strong case, then I would challenge the appraisal. I've done that multiple times successfully. Address each comp the bank used and explain why it's not a good comp, and then provide your own with your reasoning as to why they're better. The more detail you can provide the better. I would go line by line through each property to make sure they made the adjustments property (like condition, the garage you mentioned, etc).

It's my understanding that the appraisers can only count legal sq footage, bedrooms, baths, etc. So, if the attic space was converted to a bedroom without the proper permits (to make it a "legal" bedroom and put the finished sq footage on the tax records) then they won't be able to factor that into their values. 

If you lose the appeal, then you're stuck with the FHA appraisal for 120 days. Worst case you'll have to go to another buyer who can do conventional financing. If you received multiples the first day on market, that shouldn't be an issue.

You can also ask the buyer to bring the add'l cash to closing to bridge the gap. If they want the property badly they'll find a way. Of course I understand many buyers go FHA because they have limited resources, so it may not be an option. Since you had multiple offers when you listed, I would not be afraid to cut ties with this buyer and move on to the next.

Since you're getting several offers, could you instead accept a buyer that is not using FHA? Correct me if I'm wrong, but the FHA appraisal only stands for other FHA buyers.

Originally posted by @Peter Stewart :

If you feel you can make a strong case, then I would challenge the appraisal. I've done that multiple times successfully. Address each comp the bank used and explain why it's not a good comp, and then provide your own with your reasoning as to why they're better. The more detail you can provide the better. I would go line by line through each property to make sure they made the adjustments property (like condition, the garage you mentioned, etc).

It's my understanding that the appraisers can only count legal sq footage, bedrooms, baths, etc. So, if the attic space was converted to a bedroom without the proper permits (to make it a "legal" bedroom and put the finished sq footage on the tax records) then they won't be able to factor that into their values. 

If you lose the appeal, then you're stuck with the FHA appraisal for 120 days. Worst case you'll have to go to another buyer who can do conventional financing. If you received multiples the first day on market, that shouldn't be an issue.

You can also ask the buyer to bring the add'l cash to closing to bridge the gap. If they want the property badly they'll find a way. Of course I understand many buyers go FHA because they have limited resources, so it may not be an option. Since you had multiple offers when you listed, I would not be afraid to cut ties with this buyer and move on to the next.

Peter, thanks for your great response!  That is what we are in the process of doing, bring in a 3rd appraiser and/or disputing the first 2. My realtor is well-versed in this so hopefully, she can make something happen. Is that something I do to dispute or my attorney?

The issue is that I believe all the offers on Day 1 were financing offers. If it were cash, I would've taken that in a heartbeat to avoid this dragging on. I am in the business for the long-term, not short-term gains. So I really want to get this closed and done with so I can move onto the next one. I already bought 4 units additionally in another town, and I want to 1031 this into another property as soon as this closes, so at this point, if any appraisal comes in at 280k+, we will take it. 5-10k is not worth the headache of dragging this on another few months, getting another inspection report, etc.

Honestly, I thought about that option of "bridging the gap". Couple of my buddies have used that successfully in the past, to get the 10-15k difference in the contract price vs appraisal price. How would I be able to do it in a legal manner? Do I reach out to the buyer directly or via attorney? 

I have also gone that route too - get another appraisal. But that was only after my rebuttal failed. I'd try that first since it is free (vs paying for a new appraisal).

Since I am a Realtor I took care of the rebuttal for my client, and it sounds like yours will do the same. The buyers lender submitted it on my behalf. I don't think an attorney would do you much good at this point. 

In regards to bridging the gap, it's completely legal as long as everything is disclosed properly (note, it's been a while since I've had to do that, so the rules may have changed - verify with the lender). Literally the buyer just does a larger downpayment. Put everything on the proper paperwork (PA amendment or whatever your Realtor suggests) and make sure the lender is in the loop (have them review language, etc). 

@Vishesh Shah I have done thousands of transactions over the past 25 years and since the 2007 market crash its just about impossible to appeal and win an appraisal. Especially 2. The FHA appraisal I believe stays with the property for 6 months.Ask the buyer to split the difference or make up the difference if they want the house or pull the contract and re market the property and sell as Conventional financing only. Puts you in a tough spot and we deal with these appraisal issues on our flips all the time. You have to look at how much its costing you to hold it and the gamble of putting it back on the market and getting less. Also dont forget that all the money you have tied up in this deal could be used to purchase your next one. I call that opportunity cost which you need to factor into your thought process. 1. Whats it costing you to hold the property? 2. Do you want to gamble and put it back on the market and maybe have another appraisal issue? 3. What is your opportunity cost?

That is correct with FHA, the appraisal stays with the house for 6 months, so if this deal falls through and you get another FHA buyer, then that appraisal transfers to them. If you get a conventional buyer next time around, then a new appraisal will be done. I agree with Alex in that appraisal appeals are almost impossible as these appraisers are protected by third party Appraisal Management Companies that came with Dodd/Frank in 2010, meaning the appraisers are randomly assigned and cannot have contact with the borrowers. Since they are now protected, they have no reason to make any changes especially since its their license on the line if anything happens. The only thing you might be able to argue are the comps if he's using 2 BR's in all of his comps instead of 3 BR's. In order to count a room as a bedroom on an FHA appraisal, I believe it has to have heat and have its own entrance, meaning if you have one bedroom that's connected to a hallway, and on the other side of that bedroom was an attic that you made into a bedroom, you would have to walk through one bedroom to get to the other and I don't believe this is allowed. However, if the attic is accessible on its own and is set up for heat, then it should be able to be counted as a 3rd bedroom. Good luck!

@James Zettelmeyer Everything I have read states 120 days for the appraisal, not 180. Not trying to argue, just trying to get some clarification.  I know these rules change all the time so I want to make sure we all have the most up to date and accurate info.

This is one of many places I've seen the 120 days referenced:

https://www.fhanewsblog.com/2018/02/fha-appraisal-...

all this aside, you cant 1031 the profits of a flip that wasnt ever rented into another.... unless I am missing something. As was said, the appraisal is there. tell the buyers to wear it, go to the other offers and get someone non FHA or make a deal... remember, it is all about NET, not when....

You're right on that, my apologies.  Thanks!

Originally posted by @Peter Stewart :

@James Zettelmeyer Everything I have read states 120 days for the appraisal, not 180. Not trying to argue, just trying to get some clarification.  I know these rules change all the time so I want to make sure we all have the most up to date and accurate info.

This is one of many places I've seen the 120 days referenced:

https://www.fhanewsblog.com/2018/02/fha-appraisal-...