RE Headaches #1: Lenders let "As-Is" Appraisals affect the loan??

3 Replies

I was recently working with my investor to lock down a property in West Philly and his lender changed the rates since the "As-Is" appraisal came in 15k lower than purchase price of the property (the appraiser ignored the condition of the property and comparing it to properties that were damn near shells, but I digress.) As a result my buyer had to bring an additional 33k to the table when he was originally expecting to bring 13k, which caused a little bit of chaos since this was all found out literally the day before closing.

To my hard money lenders or investors that understand the process better than I do, why do lenders account for the "as-is appraisal" when, in all reality, the ARV is what is going to be influencing the borrower's ability to satisfy the loan?

Originally posted by @Jimmy O'Connor :

I was recently working with my investor to lock down a property in West Philly and his lender changed the rates since the "As-Is" appraisal came in 15k lower than purchase price of the property (the appraiser ignored the condition of the property and comparing it to properties that were damn near shells, but I digress.) As a result my buyer had to bring an additional 33k to the table when he was originally expecting to bring 13k, which caused a little bit of chaos since this was all found out literally the day before closing. 

To my hard money lenders or investors that understand the process better than I do, why do lenders account for the "as-is appraisal" when, in all reality, the ARV is what is going to be influencing the borrower's ability to satisfy the loan?

Risk Management. If I give you money, what is to stop you from taking off and living the good life in the Bahamas or gambling it away at your favorite casino? As hard money lenders your loan from us is guaranteed by a first position lien on the property in question. If we, or whoever holds the note, have to foreclose on the property we want to make sure there is plenty of equity in the property for us to recoup our money. Included in that is the costs and hassles of foreclosing and what happens if there is a market downturn and we end up with a property worth less than the mortgage?

The main issue that I see is that you were told this only a day before closing. Sounds like either closing was arranged too close to the appraisal report date or the report was delayed or someone was sitting on this info. 

@Benjamin Hurwitz so just to clarify, the reason is in the case that the borrower does not actually perform the work OR the rehab is not quality enough to satisfy the out-sale. This way when the property goes into foreclosure you, at the very least, can make up your acquisition price since you are probably lending for the rehab via qualified draws. That makes more sense to me.

Headache Relieved. 

Originally posted by @Jimmy O'Connor :

@Benjamin Hurwitz so just to clarify, the reason is in the case that the borrower does not actually perform the work OR the rehab is not quality enough to satisfy the out-sale. This way when the property goes into foreclosure you, at the very least, can make up your acquisition price since you are probably lending for the rehab via qualified draws. That makes more sense to me. 

Headache Relieved. 

Yes, That's why our draws are in arrears at each milestone. Though foreclosing and trying to sell a property that is mid-rehab is not for the faint of heart.  

So rehab aside, that's the reason most of us only lend a percentage of current appraised value. It is the reason BTW that the occasional "100% Financing" offers I sometimes see mentioned around Bigger Pockets should be viewed with caution. There is always a risk mitigation angle somewhere. Ours is at least clearly visible.

Best of luck!