How To Challenge An Appraisal?

11 Replies

Hey Bigger Pockets Fam,

Question: How Do I properly challenge an appraisal?

Problem: I have a unique situation with my first purchase, have a Triplex under contract in AZ that's 7-Total Bedrooms and I'm using an FHA Loan hoping to put 3.5% down. The appraiser is using comp Triplexes which are all 4 to 6-Total Bedrooms in the area, there are no 7-Total Bedrooms Triplexes in a 5-mile radius he can use as a comp.

The issue here, my mortgage payment would be ~$2,700/mo at 3.5%. According to FHA Loan requirements 75% of my appraised rent rolls must be greater than the mortgage, the appraised rent rolls were initially at $3,100/mo which would fall short of the requirement. He stated that since none of the 13 Comp properties had rent rolls over $3,100 that was the highest he could go, again none of the comps he used are 7-Total Bedroom Triplexes. This would fall below the threshold for the 3.5% FHA Loan requirements and my lender then called to say I'd have to put 20% down instead, making my down payment jump from 20K to 120K. The rent rolls have to be $3,700/mo in order for me to put 3.5% down.


Last night I sent an email challenging the appraisal, in the letter I pointed out that none of the comps were 7BR+ therefore the rent rolls of 4-6BR triplexes would be 15%-35% less in rent rolls per month. I produced the existing leases for the Triplex I have under contract which show $3317 in rent/mo (leases were in place Oct 2018) and are below market value, I pulled comps from Rentometer showing within a 1.1mi radius for a 3BR single family + 2 2BR Duplexes the rent rolls would be ~$3,700.

Today the appraiser adjusted the rent rolls to $3,300 but I would still have to put ~11% down. In the appraisal, he once again cited the 2 Triplexes nearby with 6-Total Bedrooms as rental comps and said he took the mean of the to in order to arrive at $3,300/mo instead of doing a per door average. He also said he can't go above $3,300 since there are no 7BR comps in the area.

What recourse do I have here? I'm trying to challenge an appraisal that has no nearby comps?! Plus, the appraiser just went on vacation to Ireland today and I'm trying to close next Tuesday! Help!

Thanks in advance,

George

PS Listened to Bigger Pockets Podcast #314 with Andresa Guidelli and tried using some of her tips regarding challenging appraisals, this is my first time buying/challenging an appraisal so could use any advice to aid in this process :)

Seems like you want to challenge an appraisal because you don't like it not because it is wrong. An SFR is not a rental comp for a triplex, it just isn't. Have you looked at what a 3 bedroom unit in a duplex or triplex looks like for rent?

@George Savaricas If there is nothing to support 7 bedrooms in the area then it could mean that there is no market reaction to 7 vs 6 beds or it's an over improvement. It doesn't seem like the appraiser did anything wrong, actually sounds like he's doing his job and following guidelines. How is he supposed to prove and support his conclusion that the 7 bedrooms is worth something if nothing exists to show? You may think he's being stubborn but really he needs to adhere to uspap/appraiser/client guidelines 1st.

If you have better comps, that is closer proximity, more recent sale date or lease info dates, and more similar in location, physical characteristics etc, that is what you need to challenge the appraisal. Just throwing out a bunch of data that is not better, won't help. Just because you disagree, or don't like the numbers, that does not matter. Stick with the facts. 

Originally posted by @Aaron K. :

Seems like you want to challenge an appraisal because you don't like it not because it is wrong. An SFR is not a rental comp for a triplex, it just isn't. Have you looked at what a 3 bedroom unit in a duplex or triplex looks like for rent?

 

Originally posted by @Aaron K. :

Seems like you want to challenge an appraisal because you don't like it not because it is wrong. An SFR is not a rental comp for a triplex, it just isn't. Have you looked at what a 3 bedroom unit in a duplex or triplex looks like for rent?

Aaron, thanks for responding! In fact, the initial appraisal was wrong. He had the appraised rent rolls at $3100/mo while the leases for the property were $3316/mo. After this was challenged he changed the value of the appraised rent rolls to $3300/mo. The part I'm having difficulty understanding is the fact that the appraiser is taking the mean of 2 Tri-Plexes with 6BR to comp what the appraised rent rolls would be for a 7BR Tri-plex? That's why I'm struggling to understand what other recourses I have? Thanks

 

Originally posted by @Suny Capezzuto :

@George Savaricas If there is nothing to support 7 bedrooms in the area then it could mean that there is no market reaction to 7 vs 6 beds or it's an over improvement. It doesn't seem like the appraiser did anything wrong, actually sounds like he's doing his job and following guidelines. How is he supposed to prove and support his conclusion that the 7 bedrooms is worth something if nothing exists to show? You may think he's being stubborn but really he needs to adhere to uspap/appraiser/client guidelines 1st.


Hey Suny, thanks for the response! The initial appraisal was in fact incorrect, he had the rent rolls listed at $3100/mo after this was challenged he changed them to $3300/mo. Everything else you laid out makes sense and that's been the subsequent end point of the conversation with the appraiser.

The part I was having difficulty understand was how the appraiser is using the mean of the rent rolls from 2 6BR Tri-Plexes to appraise the value for the rent rolls of a 7BR Tri-Plex. This has made the appraised value of the rent rolls 10-15% below what market would yield.

I really appreciate you sharing your thoughts on this topic! Best, George 

 

Originally posted by @Lee Bell :

If you have better comps, that is closer proximity, more recent sale date or lease info dates, and more similar in location, physical characteristics etc, that is what you need to challenge the appraisal. Just throwing out a bunch of data that is not better, won't help. Just because you disagree, or don't like the numbers, that does not matter. Stick with the facts. 

Makes sense! What has occurred is there are no viable 7BR Tri-plex comps and the appraiser has been using the mean from 2 6BR Tri-plex to determine the appraised value for the rent rolls. Therefore, I'm trying to understand if there's any other recourse with no 7BR comps to use? Thankfully after the initial challenge he amended the rent rolls from $3100/mo to $3300/mo and he's been very communicative so far which has been good.

Thanks for sharing your thoughts, George

 

@George Savaricas the 6br triplexes are relevant comps because I'm presuming at least two of your units have two bedrooms, as for the three bedroom unit unless you can find a 3 bed comp that is in a duplex/ triplex there isn't much you can do, the appraiser can't just make up numbers.

You could also look at four plexes to try and find that 3 bedroom unit.

I appraised a couple small 2-4's in Palmdale before. There was such limited rental comp data I ended up using 1 rental from a much larger project. But that was kind of a desperation move for rental comps. For sale comps, you must stick to 2-4, since anything more in different financing, different buyers, different animal.

@George Savaricas . George if that triplex cash flows at 3.5% down its one in a million. Many or most lenders require 25% down payment. If you need to put in 11% to get the loan and the property pays you are still getting a very good deal. My experience tells me you don’t have a bunch of experience with rentals and are trying to buy this one with no cash. That leads me to believe you haven’t vetted this thing very well and are going to have bigger troubles down the line. RR

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