BRRRR - Low Appraisals

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BRRRR - Low Appraisals

Matt InouyePro Member
Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes

Hi BP Community,

I recently encountered a situation with my primary residence that got me thinking about how it might impact my use of the BRRRR strategy.

I recently refinanced my personal residence with about 60%LTV. With (30 day old, same tract) comps in the area well north of 1.1M we were pretty confident we would get the most advantageous pricing pricing and rate on our refi.

My wife (a local RE Agent) and I were both shocked at how low the valuation came in at.  The appraiser priced our home below our purchase price 2 years ago and despite our putting nearly $40K into the kitchen and flooring when we first moved in.  We also toured some of the homes that recently closed for 1.1M and their interiors were dated by about 15-20 years.

This cost us 1/4 point on the refi fees (not rate) as our LTV was 61% and not below the 60% cutoff for the better pricing on the loan.

My concern is that the BRRRR strategy hinges on being able to get the valuation necessary to refi the property. What happens if the person appraising your house is just in a bad mood or is super off.

Has this ever happened to anyone of you out there in the BP community and how have you overcome this for your rentals.  Also, to any lenders out there, is this standard nowadays for conventional financing with the super strict TRID laws?

Big time Mahalo in advance!

Matt

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Arianne L.
Investor · Fort Walton Beach, FL · Member since 2015 · 568 posts · 966 votes
10y

@Matt Inouye What comps did the appraiser use? I usually provide the appraiser with a list of upgrades done to the house after I bought it, and a list of comps I pulled myself. 

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  • Tony Gunter
    Investor · Canton, GA · Member since 2014 · 728 posts · 500 votes
    10y
    I will be interested to hear some feed back too. Things outside of my control never feel comfortable.
    0Reply
  • Brian Larson
    Investor · Redondo Beach, CA · Member since 2009 · 147 posts · 129 votes
    10y

    This, in my opinion, is the single largest risk in using BRRR.

    I can confirm that I received a ludicrous appraisal upon my first BRRR refinance and to be honest, I am a little worried about the additional properties I have bought, rehabbed and rented. The appraisal came out about 15% below what it should have and the appraiser did not even count the sale of an almost identical property 3 doors down that was sold 2 weeks prior. Crazy.

    I will be doing another round of refi's starting next week so I should have some more gory details in the next few weeks.

    4Reply
  • Chris May
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    10y

    I'm just getting started in REI investing and this is the one area that makes me a little nervous too since it seems like such a crap shoot and out of my control.

    I was refinancing my primary residence 2 years ago and the appraisal came in shockingly low. There were two very recent sales within two blocks in virtually the same condition as our house that sold for almost 10% more than our appraisal came back with.

    It didn't matter much cause we still hit an acceptable LTV, but barely. It didn't give me much confidence in the appraisal process.

    1Reply
  • Arianne L.
    Investor · Fort Walton Beach, FL · Member since 2015 · 568 posts · 966 votes
    10y

    @Matt Inouye What comps did the appraiser use? I usually provide the appraiser with a list of upgrades done to the house after I bought it, and a list of comps I pulled myself. 

    10Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Matt Inouye:

    Hi BP Community,

    I recently encountered a situation with my primary residence that got me thinking about how it might impact my use of the BRRRR strategy.

    I recently refinanced my personal residence with about 60%LTV. With (30 day old, same tract) comps in the area well north of 1.1M we were pretty confident we would get the most advantageous pricing pricing and rate on our refi.

    My wife (a local RE Agent) and I were both shocked at how low the valuation came in at.  The appraiser priced our home below our purchase price 2 years ago and despite our putting nearly $40K into the kitchen and flooring when we first moved in.  We also toured some of the homes that recently closed for 1.1M and their interiors were dated by about 15-20 years.

    This cost us 1/4 point on the refi fees (not rate) as our LTV was 61% and not below the 60% cutoff for the better pricing on the loan.

    My concern is that the BRRRR strategy hinges on being able to get the valuation necessary to refi the property. What happens if the person appraising your house is just in a bad mood or is super off.

    Has this ever happened to anyone of you out there in the BP community and how have you overcome this for your rentals.  Also, to any lenders out there, is this standard nowadays for conventional financing with the super strict TRID laws?

    Big time Mahalo in advance!

    Matt

    Hi There Matt,

    Good to see you on BP.

    I've done a lot of these BRRR's or refi's for clients and myself and yes appraisers tend to be very very conservative on refinances.

    Reason being, on purchases, a new contract signed between buyer and seller assuming no distress is considered "market value," so appraisers are able to stretch an appraisal around 10-15% in some cases when conducting appraisals on purchases.

    This is a stark difference from refinances where they go out to the market and generally look at:

    - comps with 1/4 quarter mile (1/2, 3/4, and 1 full mile if no comps within 1/4, 1/2, etc distances)

    - most recent sold properties are used only and pending sales (not completed yet) is given 2nd class consideration

    - consideration is given to properties of the same title size, lot size, square footage, condition of the property and other

    I've often seen that upgrades and rehabs dont always give you the adjustment you (as in buyers) often want so when judging if you should do the work to improve the property its important to look at "value," through the lense of an appraiser.

    I've spent 80k before and got 100k more in appraisal and at the same time I've also spent 65k and got 30k. This value you get from the appraisal depends on the comps the appraiser used, your timing when starting the refinance and when you start to order your appraisal, and the adjustments the appraiser used to determine your value. The appraisers pick comps with the snap shot of sold properties at that time in the market so generally you want your lender to understand this critical valuation nuance because you dont want to order an appraisal when the comps are not conducive at producing the value you "need," to complete your BRRR. I always wait for the comps I need to document the value and compare the risk since appraisals are non refundable so you want to get the highest chance of certainty you can get before you press the "order appraisal button."

    Maybe the HVAC costs 12k to replace but the appraiser will only give you a 5k value for having central air instead of cadet/wall board heaters. It will be up to you to determine if you will replace the furnance or not from a valuation stand point. Of course no one uses floorboard or cadet heaters in south OC but its just an example.

    Let me know if that helps.

    6Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Arianne L.:

    @Matt Inouye What comps did the appraiser use? I usually provide the appraiser with a list of upgrades done to the house after I bought it, and a list of comps I pulled myself. 

     The appraiser for the most part cares little what upgrades were done the value can only go so much with respect and consideration given to the other sales in the area so if you know the forecast for the pending sales, and completed sales are only 60-70k higher and your superior product may only be 80-90k in value  higher than your acquisition price, but your rehab is 100k in cost then you might want to scale your rehab down to 50-60k to ensure that you'll atleast get 1:1 conservatively with the money you spent on your rehab or maybe you dont even do a major rehab but a light rehab to get 2:1 parity  (1 dollar spent to 2 dollars created in value) so that you'll have enough profit to make some extra equity for yourself for risking your capital and your time in the rehab.

    3Reply
  • Matt InouyePro Member
    OP
    Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes
    10y

    @Arianne L. Yes, since my wife is an agent in SoCal, we gave the appraiser 5-6 properties in the same tract that had closed for way higher than the appraisal came in at.  Also provided him with the invoice the GC provided to me.  Still no luck I guess.

    @Albert Bui Hey good to hear from you and your answer makes a lot of sense.  I am glad Amanda and the team at Keystone CPA pointed me in your direction.  I will definitely be in contact with you once we get our paperwork back from them.

    2Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y

    Good comps are nearly irrefutable so if you have good comps and a decent lender to negotiate value using appraisers formulas for determining value you can almost always get the appraiser to come up or meet you near where "value," should be.

    This is where the science of appraisal meets the arts of persuasion. 

    0Reply
  • Derek Daun
    Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
    10y

    I'm going through this right now on my primary residence.

    The appraisal just came back at our purchase price from two years ago despite the facts that we bought it 50k under asking price, Sacramento prices have been booming, and we've put a lot of work in since purchasing.

    I'm still waiting to see the appraisal report, but I suspect the main problem will be the house being a high water bungalow with a finished basement. These properties demand higher prices around here, but the lower level can't count towards living space, which makes comps hard to come by.

    I won't be able decide what action to take next until I see the report.

    1Reply
  • Chris Eaker
    Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
    10y

    This would be a good topic to ask about on Wednesday's BRRR webinar if they don't cover it. I'm interested too.

    0Reply
  • Chris Vail
    Investor · Sacramento, CA · Member since 2014 · 308 posts · 94 votes
    10y

    @Derek Daun, @Matt Inouye I just ran into this when we refinanced our current primary in anticipation of turning it into our next rental once we finish the rehab on our future home.  Our current home was a model home that we purchased from a builder that went bankrupt in 2009, naturally we got a decent deal because of this (in hindsight we probably could have gotten a better deal but we were very pleased at the time with our purchase). Fast forward to 2016 where the base homes around us (no upgrades, builder basics) are selling for some where between 285k - 295k.  When we got our appraisal I figured on the conservative side we would get 300k - 305k and the high side somewhere in the 315k - 320k.  Our appraisal came back at 295k and this wasn't the first time that an appraisal came back lower than I anticipated so this time I challenged the appraisal and requested an explanation on why all of the upgrades we have in our home are essentially worthless from an appraisers point of view.  The reason I was given was they do not have a like for like comp to compare it against meaning that since no one has purchased a house with a lot of upgrades throughout the house there is no bases for what they are worth.  I further asked how the new homes they are selling less than .25 miles away are able to sell above base price with upgrades and appraise at the value they are listing with the upgrades?  Answer I got was since someone is willing to pay the price and the builder backs up the cost they appraise the house at that price.  Long story short until we sell our house there won't be a comp to compare it against for a refi.

    1Reply
  • Gene D.
    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
    10y

    Appraisers are often people with very little knowledge of your local market. I’ve had multiple appraisals where the initial appraisal was more than 10 and sometimes even 20% away from actual value. You can always challenge the report and literally provide line item by line item commentary on where the initial appraisal has made errors. You can provide other, more appropriate comps in the area, outline the condition of the home, etc. Generally, the lender wants to do the deal and if you have your facts right they will send out another appraiser along with your supporting documents to provide an updated opinion of value. If this fails, you can always go with another lender, you’ll find that if you share the challenge you had with the prior lender and be upfront about the errors you perceive, they will often try to be very accommodating. But, obviously, you have to have very reasonable arguments and lots of data to back it up.

    2Reply
  • Derek Daun
    Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
    10y

    I have the appraisal report now, and am putting together my rebuttal.

    Surprisingly, he did not use any of the recent sales in my exact location of East Sac, and chose from half a mile away, specifically focusing on two comps. 

    The first comp was sold as a "contractors special", and purchased as a flip. It's unoccupied with all doors and windows boarded up three months later. I need to try to dig up more information to see if I can find any documentation to show the house was in rough shape. 

    The second comp makes no sense. It's a smaller house, half the lot size, one less bedroom, and no finished basement. He only credited 7k for the difference in lot size, even though a full size lot is worth 250k in this neighborhood. 

    I'll keep you posted. 

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    10y

    @Derek Daun - if I'm not mistaken, the appraiser is supposed to show photos of the comparables that the appraiser took when visiting the subject property. Are those photos there, and if so what do they look like?

    0Reply
  • Derek Daun
    Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
    10y

    @Steve Babiak Yes, the appraiser included a picture of the front of the houses used for comps, but it's not very useful. There aren't any pictures of the inside. I've already driven past the primary comp, and it is currently boarded up, so there's no way to see the inside. Additionally, it was purchased by an LLC for cash, so any reasonably appraiser should have known it was purchased for under market.

    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    10y

     I've had about 30 appraisals in the last 2 years and here are some thoughts that I would add.

    1) An appraiser will very much care what improvements were made. If you bought a house for 90k and did nothing to it, the appraiser is going to have a very difficult time giving you an appraisal for 160k.  They will ask how any value was added beyond what was paid. 

    2) I'm convinced appraisers look at your initial sales price and the poor ones will use that to temper your appraisal by "comp'ing down" on your house.

    It is very easy to comp down an appraisal. I can tell the bank immediately when I get a low appraisal that the comps they used had to have been lower square footage homes.

    If I have a 3/2, 1,700 sq ft and they comp it with a 3/1, 1100 sq ft home, there is no way they're going to hit the real number - even with a 5k or 10k adjustment for the square footage and bathroom.

    The reality of it is, the 600 sq ft of space is worth way more than 10k. 

    I've seen it time and time again. Its like the appraiser has picked a number and then found some comps by comping down that would reflect that price. Its pure stupidity. Its like they literally don't believe that someone could pick up a house for 70% of the ARV.

    3) What you can do. The first thing you can do is complain to the bank. Point out the comps that were used and the better comps that existed. Sometimes they have the leeway to go from, say, 70% LTV to 75% LTV even if they won't admit it. :-)

    If that doesn't work, ask them for a review. I've had poor luck with this but have had one adjusted.

    Lastly, pay for another appraisal. I've done this twice. Both times, the new appraisal came in right in the middle of my range. 

    So is there an appraisal risk in the BRRR strategy in terms of appraisals? Yes. Definitely. Most of the appraisers are right on the money though. But every once in a while, you get one that thinks it makes more sense to compare a 3/2, 1,700 sq ft home with a 3/1, 1100 sq ft home because its on the same block than it is to compare other 1500 to 1900 sq ft homes. If you do, contest it with the bank and hope they budge OR pay for a new appraisal.

    Typically, the new appraiser will want to come thru for you. So share the numbers. And share your comps.  I always try to hint at my range before the appraiser goes out to the house. But that doesn't seem to matter these days.

    Believe it or not, it was much easier to hit an appraisal range during the bust than it is today. However, I think if you're numbers are actually correct, you'll have no problem getting the number you need to do the loan.

    4Reply
  • Matt InouyePro Member
    OP
    Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes
    10y

    @Gene D. So the funny thing with our appraiser is that he actually lived in the same housing tract that I lived in... literally like a half mile from my house.  So you can imagine my thought process:  I'm thinking ok cool we got this... if he appraises my house for a high value, that helps him out with the valuation of his own home, there are four other sold comps coming in at 1.1M, I should be good for the appraisal... haha not quite.  Or perhaps the low appraisal might have been on purpose to avoid any appearance of conflict of interest since he lived in the same tract.

    @Mike H. Thank you for the info... yes it seems a lot of folks on this thread have had similar issues.  Also, we did try to appeal it but as you know appraisers very rarely go back on their initial valuations.  Maybe part of the issue is we weren't working directly with a community bank.  So I couldn't sit down with the underwriters and explain the issues with the appraisal.  

    I think I might have paid for a second appraisal except the additional price break for not hitting the <60% LTV was $1,200 in savings and my rate lock was only 8 days from expiring. So with a new appraisal costing $600 and probably another week to schedule it, I just ate the up front cost and locked down the refi.

    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    10y

    Thats the thing. In the end, even the few bad appraisals I've had, the bank was still willing to do the refi. So I don't think its as bad as people think - at least not for those people doing the BRRR strategy and that are refinancing with local banks into commercial loans.

    Now in some areas, 5% off an appraisal would be huge (i.e. 500k home). But when you're talking 150k estimate coming in at 145k, what is that really costing you if you do have to come out pocket.

    The other thing I would suggest is that you typically want to be all in at 70% ARV anyway. If you're doing deals at 75% and you get stuck with a bad appraisal that comes in at 80%, you just need to be prepared to pony up the 5%.

    In your case, the loan was going through anyway so there was zero effect. And, like I said before, for the commercial loans with local banks, I've had a couple of bad appraisals. Banks just said they agreed with me and would do it anyway even if the LTV got pushed up above 70%.....

    1Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Chris Vail:

    @Derek Daun, @Matt Inouye I just ran into this when we refinanced our current primary in anticipation of turning it into our next rental once we finish the rehab on our future home.  Our current home was a model home that we purchased from a builder that went bankrupt in 2009, naturally we got a decent deal because of this (in hindsight we probably could have gotten a better deal but we were very pleased at the time with our purchase). Fast forward to 2016 where the base homes around us (no upgrades, builder basics) are selling for some where between 285k - 295k.  When we got our appraisal I figured on the conservative side we would get 300k - 305k and the high side somewhere in the 315k - 320k.  Our appraisal came back at 295k and this wasn't the first time that an appraisal came back lower than I anticipated so this time I challenged the appraisal and requested an explanation on why all of the upgrades we have in our home are essentially worthless from an appraisers point of view.  The reason I was given was they do not have a like for like comp to compare it against meaning that since no one has purchased a house with a lot of upgrades throughout the house there is no bases for what they are worth.  I further asked how the new homes they are selling less than .25 miles away are able to sell above base price with upgrades and appraise at the value they are listing with the upgrades?  Answer I got was since someone is willing to pay the price and the builder backs up the cost they appraise the house at that price.  Long story short until we sell our house there won't be a comp to compare it against for a refi.

     Great Point, Chris and this is what I meant by the "appraiser cares little for what upgrades are done," because it depends on the comps. If there are comps that are in good condition and ok condition not selling for much more that means when an appraiser goes out to two those two comps that they will not give you much for your signifcantly better condition property. The appraiser will reason that based on the market comps a buyer is not paying much more for the upgrades. These upgrades might be 30-50k in cost but only get 5-10k margina value add from an appraisers point of view. It all depends since the opposite can happen as well if you order an appraisal at a time a fully upgraded house sells for 50-60k higher you could get a huge bump in value for having a better condition house. It just depends on the comps, the snap shot, at the time the appraisal is ordered. The lender should understand this and not spend your money on a non refundable appraisal unless there is a high chance of obtaining the value you may need to complete your transaction.

    0Reply
  • Charles Kao
    Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
    10y
    Matt Inouye I have had this concern many times and I feel refi appraisals are always more conservative. I actually utilize a bank that does a no appraisal refinance based on taxable value of this home for this reason which I know is very unique. I always try to be present when appraiser is there to point these things out and also leave comps. If for example homes are 125 dollars a sq ft unfortunately you should expect that or close to that so if you are not comfortable with that valuation, I would not try to refi. Also, if there is a recent sale in your area of a house that was flipped I like to use those comps to show updated homes capture alot of appreciation. Lastly I even ask the lender if they are conservative with appraisals, I have straight up had some that said they were very conservative and others say yes but their appeals process is simple.
    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    @Brian Larson @Chris May, did you present the appraiser with that comp that you wanted him to use? 

    @Gene D., challenging appraisals has a surprisingly low success rate. 

    A few things I will note. 

    • Way better to give appraisers the comps you want them to see up-front than to later challenge an appraisal. When you challenge an appraisal, you're asking a professional appraiser to admit that someone who is not an appraiser is better at their job than they are. And then they have to go justify to their AMC why they should even be an appraiser, if they do indeed adjust value based on comps you provide after the appraisal report is issued. Good luck with that.
    • Failing that, I've had success ordering a second appraisal. If the first one was truly bad, our appraisal review folks will confirm that the second appraisal is more credible, and that's the value we will use. This makes sense for us from a business perspective, because the alternative is that you simply take your business elsewhere and start over with a new lender.
    • I also train my realtors/refinancers to take down the name/email/phone of the appraiser when she or he calls, and to give that name to me. I know who the conservative appraisers in my market are.
    • Appraisers will give value for improvements, but they need to be able to justify with data. From what I have seen, it's rare that $5k in floor work adds $5k in value. Kitchens/bathrooms, sometimes you can get back what you put into it dollar for dollar if the old kitchen/bathrooms were truly horrible and you have the before/after pictures to back it up.
    • If an appraiser opines high and then it sells way below that at foreclosure, there can be professional consequences. I've been told that big banks are especially litigious when it comes to going after appraisers. A few years ago, and I'll never forget this, I was straight up told "the bigger the bank, the more conservative I am going to be." This is completely ludicrous of course, but sometimes that's how the world works.
    • In general, appraisers are more liberal with purchase appraisals because they have a contract price right there indicating most probable market value.
    • Because of the above, they mitigate professional risk by being conservative on refinances. There isn't an entire house on the line during a refi, typically all that is on the line is "save $25/month!" which is the garbage (and not worth it IMO) reason most people do refinances, so they sleep well at night based on the fact that typically a low refi appraisal doesn't really have consequences for anyone.
    1Reply
  • Gene D.
    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
    10y

    @Matt Inouye  That is funny indeed, either way, I'd have another if I was confident in my numbers.

    @Chris Mason  I've been able to challenge and win on multiple occasions, its not about the appraiser not wanting to look as though they dont know what they're doing, its about you knowing what you're doing in challenging them.  And agreed, if the first appraisal doesnt work, just get another from a different bank.  

    To you other point on knowing which appraiser is more conservative, you'll find that many lenders assign an appraiser and you have no way of controlling who actually gets assigned.

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Gene D.:

    @Matt Inouye  That is funny indeed, either way, I'd have another if I was confident in my numbers.

    @Chris Mason  I've been able to challenge and win on multiple occasions, its not about the appraiser not wanting to look as though they dont know what they're doing, its about you knowing what you're doing in challenging them.  And agreed, if the first appraisal doesnt work, just get another from a different bank.  

    To you other point on knowing which appraiser is more conservative, you'll find that many lenders assign an appraiser and you have no way of controlling who actually gets assigned.

     There's not like a drop down where you can pick the appraiser, but we have ways of nuking an assignment if it's one of the appraisers that we're working on having removed from the panel anyways. 

    0Reply
  • Derek Daun
    Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
    10y

    I have a suspicion the problem might be in my bank itself. Most people on Bigger Pockets agree the dirty little secret in appraisals is that the banks do still communicate with the appraiser regardless of what the law says. "Someone" gives the appraiser a target price that the appraisal seems to miraculous hit. The last three mortgage appraisals I've done with Chase came with in $500 of the price.  In this last case, the broker told me the price coming out of the banks estimator system, which turned out to be extremely close to what the appraiser came back with. 

    Before I put the work in and write up the review, I need to hear back from my broker and verify if he's willing to play ball with the appraiser. My old rock star broker quit Chase and moved to Wells Fargo, so worst case scenario we'll track him down and switch. 

    0Reply
  • Gene D.
    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
    10y

    @Chris Mason

    It depends on the lender, as an example, with Citi you have zero control, I'd imagine the same with Wells, JPMorgan, etc

    0Reply
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