How to/should I challenge the appraisal?

Question

Hi BP,

I've heard of people challenging their appraisals on the BP podcast so I am assuming that is a semi common thing. My situation is that I am a realtor helping my girlfriend buy her first property/investment. The plan is to flip it or BRRRR. We are under contract for 80K and expect the ARV to be about 195-205K. The property does need some repairs/updating (windows, refinish floors,new roof, etc) but its mostly cosmetic.

My understanding is that cosmetic related issues don't have a crazy affect on the property value so we expected the appraisal to be significantly higher than our purchase price. But it came back at 90K.

The appraiser was able to see the contract.. which means they saw the price we agreed on, and I feel like that influenced the homes they used as comps and affected the appraised value. The home right next door to our sold earlier this year for 180K and it is 200 Sqft smaller and comparable in every way- but it and other homes recently sold on the same street were not listed as comps. The appraiser used other comps in the area further away.. and I'm thinking it's just because they sold for lower prices closer to our purchase amount.

So my question is what should we do? I don't expect this appraisal to hurt the ARV once the home is fixed up- but I know if the appraisal was higher she could possibly use that extra equity to fix the home up via HELOC (this is exactly what I'm doing now and it is very convenient).  Should we do something about this appraisal now or just explain all of this down the road to a different appraiser if we were to want to capture that equity?

Tamara Deering · Answer

You can challenge an appraisal but it probably won't work.  The appraiser reviews the properties that have sold in the area and selects the most comparable based on condition (and yes cosmetics do count).  When I'm preparing a market analysis or BPO I have two buckets of properties, As Is and As Repaired.  The as is properties are what I would compare the home against so if you are purchasing in an area with a lot of fix and flips chances are there are a significant number of properties that are in similar condition to your girlfriend's place that sold for considerably less than ARV.

When you said the home next door sold for 180k and was comparable in every way, was it really or did it have newer systems and updated cosmetic improvements?

If you want a higher appraisal you will probably need to hire a new appraiser and submit that appraisal to the bank.

John Teachout · Answer

Just to clarify, replacing windows and roofing is not cosmetic repairs and will significantly affect an appraisal as that could be 20 or 30k worth of work depending on the house. Was the appraisal one involved with the lender? If so, those are for the benefit of the lender to ensure that the property is worth what they're loaning on it. When you fix it up, then you can hire an appraiser to get an accurate value on the property.

Aaron Millis · Answer

@Tamara Deering When I said comparable in every way I meant if the two were both in their finished stages. That home that sold for 180K is definitely better than ours now, i just meant its the same age, same home type, same bed bath count, same flooring etc.. and its 50 feet away vs the other comps being .5 miles away. But I get what you are saying with the as is vs as repaired.

Maybe this gave me an unrealistic expectation for appraisals regarding buying distressed homes- But I bought my current home earlier this year in a similar position. It needed a lot of repairs (similar to the amount of repairs this home will need) and my home appraised for 40K more than my purchase price. Once It's fixed up  I believe it will be worth probably 10-15K more- and that is why I assumed "cosmetic" issues didn't affect the appraised value much.

@John Teachout Fair enough, perhaps I used the term "cosmetic" too loosely, but the point I was making is that the home is in livable condition. Like if nothing was replaced it would still be a functioning home.

And 20-30K lower than ARV would make total sense to me. But 100K didn't make sense to me. However - yes it was an appraisal involving the lender so perhaps it was just to satisfy them.