Rental Property Investor · Tallahassee, FL · Member since 2016 · 50 posts · 6 votes
We bought a place for cash (got a great deal) and are trying to finance it to cash it out (we gave the approximate value that it should go for). It's our first time doing this. We do have a tenant. Process looks good with the lender, however they are asking us this:
o Did you make substantial improvements to the property and if so what were the improvements and do you have a builder contract or invoices to document cost? Reason why we are asking, is the appraiser will need to justify how value increased by $33.5k.
We did a few upgrade ourselves but nothing major that needed a contractor; mostly clean up, fixing fences, changing bathroom hardware, etc. We just got a great deal. How we do justify this to the lender/appraiser? Anyone have a standard answer?
Lender · Cleveland, OH · Member since 2011 · 588 posts · 437 votes
7y
@Zoe Mercier assuming you are getting a conventional mortgage the bank will order the appraisal. You are past the 6 month period so you should be good using the new value.
If you have not done substantial upgrades then you will want to explain how or why you got such a good deal. The first thing an appraiser is going to do is look at public records and see the price that the home just sold for 7 months ago. An appraiser is not likely to a 20%-30% appreciation unless it can be justified.
- Do you have the appraisal back yet? No, we wanted to be sure the bank will work with us on the loan first (less than $100,000). On that note, is is like traditional mortgages where the bank has to solicit the appraisal? Or can we just contract our own and show up with it in hand?
- Where is the $33,500 figure coming from? We estimated the value of the home based on similar sales so that estimate minus what we paid is where this amount comes from.
Lender · Cleveland, OH · Member since 2011 · 588 posts · 437 votes
7y
@Zoe Mercier assuming you are getting a conventional mortgage the bank will order the appraisal. You are past the 6 month period so you should be good using the new value.
If you have not done substantial upgrades then you will want to explain how or why you got such a good deal. The first thing an appraiser is going to do is look at public records and see the price that the home just sold for 7 months ago. An appraiser is not likely to a 20%-30% appreciation unless it can be justified.
Investor · Atlanta, GA · Member since 2016 · 241 posts · 86 votes
7y
Yes you should absolutely provide documentation of all improvements that yourself and the contractor did on your property. Just know the certain improvements have more of an impact on the value the others like kitchen and baths will have more impact and garages not so much.
Rental Property Investor · Tallahassee, FL · Member since 2016 · 50 posts · 6 votes
7y
Most work was sweat equity; nothing structural that needed a contractor. A lot of cleaning and removing much of the junk left behind by the original owner. Painting and other minor repairs. Replacing wood rot on the deck and stairs and replacing the fencing around the back yard. Some new bathroom fixtures were added and the stainless steel appliances in the kitchen are new. But ultimately we just got a really great FSBO deal.
This is our first time securing a mortgage on a property we own and we assumed that it would be appraised at current market value. And this assumption was based on many hours of research I have done from listening to podcasts to reading blogs to having discussions with people at my local investor meetup. Never did this come up as an issue even in all the BRRR strategy reading I have done or listened to. And I didn't ask because I guess it was a case of "we didn't know what we didn't know". Are we screwed then?