Appraisal Came in Very, Very Low!

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Appraisal Came in Very, Very Low!

Account Closed
Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes

I put several duplexes on the market through a real estate agent for roughly $190K. We didn't pluck this number out of thin air. There was another property that had sold on the street a few properties away for $190K.....although it was a single family home. Same basic building structure, his was SFH, mine were duplexes. So, 2 days after they were placed on the market, we sold the first one around $190K. Then we sell 2 more in the 1-2 weeks also for $190K. So at this point they all show as pending in the MLS. The other day the appraiser for the first one comes out. He appraises the property for $125K. BTW, this is an FHA loan, people wanting to do a house hack. One of the other is an FHA as well, the third is conventional loan. So obviously, the $125K is a problem. My agent has submitted a rebuttal on the appraisal to the lender.

Anyone with suggestions as to how to approach this?  Frankly a 30% difference between an appraisal and 3 independent sales seems like the appraiser is ignoring the market.

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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
8y

EDIT: File this post in the "things you need to hear" bin, not in the "things you want to hear" bin. And this is my $0.02, feel free to toss it in the trash and do your own thing!

Three things:

  • Appraisers can't compare SFRs to duplexes any more than they can compare duplexes to space ships. It could not be more irrelevant what SFRs go for, period. 
  • You should be focused on "setting the comps" the way builders do, and selling them one at a time with a step-up in sales price each time (just like builders do), not all at once. 
  • Supply and demand... you put too much supply out there all at once. Why would you as a seller create what appears to be a fire sale of duplexes in the area????!!!! This is clinical insanity. 

I would cancel all of these listings, do my homework, and try again once I'm actually ready. 

The appraisers aren't the only ones "ignoring the market." Take that hand you have pointed at the appraisers, and note that 3 of those fingers - one per duplex - are pointed right back at you.

Good luck.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    8y

    EDIT: File this post in the "things you need to hear" bin, not in the "things you want to hear" bin. And this is my $0.02, feel free to toss it in the trash and do your own thing!

    Three things:

    • Appraisers can't compare SFRs to duplexes any more than they can compare duplexes to space ships. It could not be more irrelevant what SFRs go for, period. 
    • You should be focused on "setting the comps" the way builders do, and selling them one at a time with a step-up in sales price each time (just like builders do), not all at once. 
    • Supply and demand... you put too much supply out there all at once. Why would you as a seller create what appears to be a fire sale of duplexes in the area????!!!! This is clinical insanity. 

    I would cancel all of these listings, do my homework, and try again once I'm actually ready. 

    The appraisers aren't the only ones "ignoring the market." Take that hand you have pointed at the appraisers, and note that 3 of those fingers - one per duplex - are pointed right back at you.

    Good luck.

    19Reply
  • Brian Pulaski
    Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
    8y

    Have they all appraised yet? Were they all low?

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  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    @Brian Pulaski No, the only one appraised so far is the first one at $125K. However, it was an FHA appraisal, which as I understand it goes into the system. I'm assuming that does not affect the other FHA positively. Not sure how it affects the duplex that sold with a conventional loan.

    @Chris Mason Thanks for your comments. Not sure how I "ignored the market" or what I could have done differently. Initially we put the first one on the market, it sold within 2 days at $190K to a buyer with an FHA loan. I understand that you and other lenders believe it can't be compared to a SFH. But in this particular area there were no other duplexes of it's type sold. The SFH on the block that did sell was the same building that the owner converted to a SFH by taking a kitchen out, etc. Same identical structure. In fact, when these properties were originally built 100+ years ago they were all identical. They were all placed, as a group, into the National Register as historic buildings. We thought it was a decent clue for value. And actually, at the price, sold more quickly and had more interest than the SFH. There was no homework that I could have done that would have led me to go 5.5 miles away to find my comp. In fact, I could go 5 miles in another direction and find duplexes selling for twice the value. As I said, the properties are somewhat unique, as buildings go, hard to comp. But let's take your analogy of a "firesale". So yes, we had a firesale that took place at $190K. That looks like where the buyers, unrelated, found value. Why were not these values at least reflected in the appraisal? They were on the same block, not 5.5 miles away.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Account Closed:

    @Brian Pulaski No, the only one appraised so far is the first one at $125K. However, it was an FHA appraisal, which as I understand it goes into the system. I'm assuming that does not affect the other FHA positively. Not sure how it affects the duplex that sold with a conventional loan.

    @Chris Mason Thanks for your comments. Not sure how I "ignored the market" or what I could have done differently. Initially we put the first one on the market, it sold within 2 days at $190K to a buyer with an FHA loan. I understand that you and other lenders believe it can't be compared to a SFH. But in this particular area there were no other duplexes of it's type sold. The SFH on the block that did sell was the same building that the owner converted to a SFH by taking a kitchen out, etc. Same identical structure. In fact, when these properties were originally built 100+ years ago they were all identical. They were all placed, as a group, into the National Register as historic buildings. We thought it was a decent clue for value. And actually, at the price, sold more quickly and had more interest than the SFH. There was no homework that I could have done that would have led me to go 5.5 miles away to find my comp. In fact, I could go 5 miles in another direction and find duplexes selling for twice the value. As I said, the properties are somewhat unique, as buildings go, hard to comp. But let's take your analogy of a "firesale". So yes, we had a firesale that took place at $190K. That looks like where the buyers, unrelated, found value. Why were not these values at least reflected in the appraisal? They were on the same block, not 5.5 miles away.

    I ran into this issue in Texas on all the flips I did there .. the appraisers were not up to speed with the market.. and at that price point almost all the buyers are FHA .. I exited the market... was not a good place for us to work.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y

    I had a bad appraisal on a little house I was selling this spring.  It wasn't the value, but earth to wood contact noted.  The house was on a hillside of sorts and this started a cascade of full WDO reports and maps and all kinds of problems.

    To get out of this appraisal and make it invalid, we had to wait 6 months.  Sometimes it may be 90 days.  I sold to them on contract/seller financing for a short time so they would just need a refi loan.  Saved myself a bunch in title insurance, too.  

    I had no agent of course in my sale, but it could be an option.  Sell with seller financing for 6 months and let them get a refi loan. Your sale will be the comp.  Paying agents will probably not allow this to work, but it's what worked for me.

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  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    @Steve Vaughan Not bad advice. I will consider that. As you say, the agents would be an issue, but maybe I could work it out. How does the FHA appraisal on duplex #1 affect the other FHA sale? Do you know? How about the conventional sale?

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Account Closed:

    @Steve Vaughan Not bad advice. I will consider that. As you say, the agents would be an issue, but maybe I could work it out. How does the FHA appraisal on duplex #1 affect the other FHA sale? Do you know? How about the conventional sale?

     Who's to say how they will comp if they ignored the same house down the street because a kitchen was pulled, making it a single-fam again. Hopefully the same appraiser doesn't do all 3 LOL.

    Curious, Jim. Selling three appreciated properties in the same year will make Uncle Sam and possibly your state very happy.  Are you using the 1031 tax-deferred exchange option? Or just eating it?

    1Reply
  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    Actually my plan, such as it is, was to pay the tax.  Maybe I could enlist Uncle Sam to speak to the appraiser for me! Lol!  What do you think?

    1Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    How much would rents be for the duplex? If anything, most duplexes I see for sale in TX sell for more than SFH in the area because there are so many investors who want them.

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    Maybe it’s only actually worth 125k .
    1Reply
  • Vinay H.
    Cambridge, MA · Member since 2017 · 268 posts · 247 votes
    8y

    If this was 2006, not only would your duplex appraise for 200k but the bank would loan the buyers 105% of LTV.

    And we know how that ended :)

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  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    @Dennis M.  Obviously that could be the case.  But on the one hand on that street we have 3 duplexes sold to independent buyers all with their own real estate agents at $190K, and on the other hand, we have an appraiser who went ignored those sales and went 5.5 miles out of the area to find a comp for $125K. Frankly, I'd like to buy one at $125K myself!  Either way, a new piece of information today.  The lender agreed with my agents rebuttal when they did a review of all the facts.  They have now forwarded it to the Appraisal manager with the Appraisal company, who is having a panel of appraisers take a look.  We should find out their opinion in the next several days.  What this really comes down to is whether buyers and sellers make a market, or does an appraiser make the market.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y

    Like Chris said, a duplex simply can not be compared to a sfh. The fact that it is the same house makes no difference. Even if the appraiser were to make a mistake and use a sfh, the underwriters would reject the appraisal.

    When there are no comps of multis, you need to be prepared for appraisal problems.

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  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    @Russell Brazil Would there be any reason you would not want to use other sales of duplexes on the same street? There were 3 duplexes sold around $190K, they show as pending in the MLS.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y
    Originally posted by @Account Closed:

    @Russell Brazil Would there be any reason you would not want to use other sales of duplexes on the same street? There were 3 duplexes sold around $190K, they show as pending in the MLS.

     Pending, not closed. Only closed sales can be used. Pending sales you have no firm data as to their sales price, or if they will even close. Closed sales within 90 days are given preference, and must be within 180 days.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Account Closed:

    Actually my plan, such as it is, was to pay the tax.  Maybe I could enlist Uncle Sam to speak to the appraiser for me! Lol!  What do you think?

     Even though he has a vested interest in your profit maximization, I doubt Uncle Sam will be speaking on your behalf here. Would be funny, though! 

    I spread mine out or will exchange.   Sold 3 smalls over 9 months since last June, stretching #3 into March of '18.  No more for me this year.  Worked too hard to want to play in a new bracket! 

    0Reply
  • Michael Kuo
    Member since 2018 · 2 posts · 2 votes
    8y

    Great discussion.  For any newbies out there, the problem with appraisals below offering price is that the underwriters of the loan will only cover up to the asking price, and the difference needs to be covered by the buyer.  For the seller this means that the deal might fall through.

    ref: https://www.trulia.com/guides/home-appraisals/

    2Reply
  • Nik S.
    OH · Member since 2014 · 454 posts · 227 votes
    8y
    @Jim Piper This happened to me. I made my agent take out that we accepted FHA and only showed it to Conventional buyers essentially. Eventually a conventional buyer came (way prior to the 6 month FHA appraisal expiration). It appraised as it should have. I did end up accepting a lower price than I wanted but not as low as the FHA appraisal. The way it sounds, someone conventional will come sooner than later. I hate FHA financing but have had only 1 bad experience with a low appraisal. It’s the worst feeling but it’s part of the business.
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  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    @Russell Brazil Actually I'm told that an appraisal can include closed sales, pending sales, or active listings.  it must have at least 3 closed sales.  Others can be used, and in this case, happen to be on the same street within buildings of each other ie pending sales.  All the information may not be known, but what they do know is the most recent and timely.

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  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    @Michael Kuo Thanks for posting that link.  Quite informative.  Here's what is happening now in this situation:

    Challenge the appraisal. This option is a bit of a long shot. Only the appraiser’s client — the lender — can demand a review of the appraisal, and only the buyer can request a review or a second appraisal. As the seller, you can support the buyer in this effort by sharing the competitive market analysis that you received from your agent or by giving her the results of an independent appraisal, if you have one. You also can offer to split the cost of a second appraisal if the lender agrees.

    This route has long odds because the decision is ultimately up to the lender, and the lender doesn’t have the same investment in the transaction that the buyer and seller have. If the lender doesn’t have a compelling reason to doubt the appraisal, then that tends to be the end of the line. (In my experience, only a small percentage of these requests are granted.)

    The buyer signed off on the request for a review.  Information has been provided by the listing agent.  And at this point, the lender is in agreement.  What remains is a review by a panel of appraisers.

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  • Jim Cummings
    Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    8y

    @Account Closed. You'll have 4 Options with Low Appraisal. 

    1. Sell at Appraised Price.

    2. Buyer can bring the difference between Appraised price & Selling Price in Cash.

    3. Buyer & Seller agree on something in between with Buyer bringing Cash to make up the difference.

    4. Seller refuses to Sell at the Appraised price.

    Once the Appraised Value is in the FHA System, it's in for 6 Months. And a New FHA Buyer will be subject to same Appraisal Price for the next 6-Month period. Would not pertain to a Conventional or VA Buyer.

    There is an Income Approach to Value on the Appraisal Form, and the Appraiser should have completed this section as well. Appraiser has the option of picking which approach they feel is most appropriate in establishing the value. 

    Void the Sale, You just got screwed over.  

    1Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    8y

    "There were 3 duplexes sold around $190K, they show as pending in the MLS."

    LOL

    2Reply
  • Ramon Grullon
    Member since 2018 · 4 posts · 2 votes
    8y
    @Jim Piper NOT AN EXPERT, BUT...I heard not too long ago on the Podcast that you need to sell duplex and more like a business not a home. Because that is exactly what it is.
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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y

    @Account Closed it sounds like the appraisal was a comparable to another duplex, probably of similar size, age and condition. Did they include an income approach analysis for the value of the duplex? That would determine market rents for your type of property and value it that way. Usually my appraisals have both, so it includes a comparable by size, age, location and also rent comparison. 

    I am also curious because you refer to "a duplex" 5.5 miles away. Usually they compare to three other properties. Were all those properties 5.5 miles away and were they all in the $125K range? Did all the comparable duplex rent for the same amount? If they found three properties similar that sold that much lower, this may be a uphill battle.

    As others mentioned, none of your duplex have sold. They are all under contract, but the contracts are probably subject to inspection, appraisal and financing. It is only sold when the title transfers. That is why cash offers always win, because there are many reasons a deal can fall through, appraisals being one.

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  • Account Closed
    OP
    Investor · San Antonio, TX · Member since 2014 · 142 posts · 104 votes
    8y

    @Joe Splitrock Thanks for your comments.  So what I may have failed to get across is that these duplexes are all on the national historic registry.  They have a particular kind of uniqueness to them for buildings that were built in 1890.  These were completely rehabbed a few years back.  By rehab I mean they were gutted.  Everything in them was new, from electric and plumbing, to items as small as nails.  Literally everything new inside.  I'd say one problem here is that the appraiser didn't understand what had been done to the building, or the area where it exists.  That was probably my agents fault.  Nonetheless, I think the appraier approached the  duplexes as  boxes, a certain size, etc etc.  Condition I don't think he really considered, because as you know he was not inside the comps, just my property.  All of the comps were older buildings, they just had not been rehabbed other than perhaps superficial stuff like paint.  Perhaps you know that old buildings many times have the old knob and tube wiring.  And then there was the issue of the area.  None of his comps were in the same zip code.  This is an urban area.  5.5 miles can be the difference between night and day.  

    Let me give you an example though.  We also sold a duplex right next to the subject property.  The buyer was represented by her agent, but we did not have a listing agent on that one.  So it is not in the comps at this time.  We sold that property to her for $134K.  The reason was it needed significant rehab.  I estimated perhaps $70K.  The buyer estimated $90K.  It was appraised, yesterday the results came in.  I don't have  the price, but it appraised.  So we're now in the peculiar position of have a property in need of significant rehab, appraised for $10K more, sitting next to a property that has been fully  rehabbed.  

    The comps in the low appraisal were all out of the area, all varying distances from the subject property. He had 6 comps. Several were over 5 miles away. He had a few that were 3-5 miles. The areas though are significantly different, again, urban areas are that way. And again, he should have used the pending sales on the street according to other appraisers I have spoken with. Are they complete? No. But they are more or less exact comps, in the exact area. They have been inspected. The buyers have been approved. We're waiting for appraisals on them. One of them though is an FHA loan, so it may be that that appraiser will see the first appraisal. There is one conventional loan that may not see that, so we could get a fresh appraisal.

    Either way, I agree with your conclusion.  I think it's an  uphill battle.  As I mentioned prior in the thread, we have a rebuttal in to the appraisal.  The rebuttal was signed off on by the buyer.  The rebuttal was reviewed by the lender, who agreed with us, and have forwarded it to an the appraisal company that hired this particular appraiser.  It will be reviewed.  We'll see how that comes out.  

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