Cash Out Refi - Any reason to not over estimate the value?

8 Replies

I'm coming up on a cash out refinance scenario and I'm a bit confused on one topic... What do I tell the lender regarding my property's estimated value when shopping around and beginning the process, before the appraisal comes back? 

I had my realtor's appraiser give me an off the cuff estimate on my property of 350-360K, but I don't really know exactly where my property should appraise, especially as values continue to rise and this was just a very rough estimate. 

There aren't really any good comps within a 2 mile radius :

  • Very few recent multifamily sales (within the last year)
  • Most recent multifamily sales are in rougher areas and rougher condition or are further away (3-5+ miles)
  • Most recent multifamily sales are duplexes/triplexes with fewer beds/baths per unit (2/1 vs 3/2)

    I'm not approaching DTI limitations and I want to maximize the amount I can cash out. Would there be any downside to giving an estimated value above those numbers, say at 375K, and then just going lower if the appraisal comes in lower? Or could that come back to bite me somehow? I'm concerned that if I say lower and the property is worth more, the appraiser will simply come in at the value I provided.

    Thank you in advance.

    I'm in a very hot market and sometimes when I'm working with flippers or any home seller, we'll get offers way over asking that we go into escrow with.  Some times we can't get them to agree to pay the difference if a low appraisal comes back.  I had a few flippers who have taken tens-of-thousands-of-dollars hits to their profit because of that.  Your situation is similar in that you are trying to cash out your "profit" (or equity in your case) with the refinance.  If the appraisal comes in low, you'll take a hit to the amount you can cash out.  A way that I have learned from an appraiser of many decades to help with this is the following tactics.  The following does assume a very hot market that is appreciating rapidly.

    Warning: It can get a little confrontational.  If you are the one who is going to allow access to the appraiser, which you should be since you're the landlord, make them call you for access.  Don't give them a lockbox code or tenant access.  When they call you, you ask them 1) "Are you checking prices are stable or appreciating in your appraisal report?"  If they answer stable, say that you don't trust that they are competent enough to do the job and you'll be requesting another appraiser.  If they check appreciating, move onto the next question. 2) "Are you making time/market condition adjustments to your comparable sales?"  If it's some form of no, you request another appraiser.  When you talk to the lender, you disclose the questions you asked to share why they need to find someone who is competent enough to make those adjustments.  

    One thing to watch out for in my prescribed tactics is that it applies more to single families and small multis (4 or less). Once you get to 5+, it's all about that cap rate so both questions may not apply since 1) prices are based on NOI and cap rates and 2) values are based on NOI and cap rates lol. I'm thinking the question you should ask in that case might sound something like, "Are you making time/market condition adjustments to cap rates?" I'm not a large multi-family guy so I can't be sure.

    To answer your original question, no I don't think it really matters what you tell the bank what you think the value is.  On one of my most recent purchases, I told the bank its probably worth $180,000 on a purchase price of $160,000.  Appraisal came back at $245,000.  Too bad banks won't lend on purchases based on appraisal too lol.

    Your range isn't a huge spread. Just tell them $350k - $375k. As a mortgage broker, I'm constantly seeing people claim "value can come in at $150k or $250k. Depends on the appraiser."

    You should tell them what you think it's worth; just be honest. Playing with the truth is something you don't want to do with lenders, and in this case it's just pointless. The appraiser could care less what you think the value is. If the lender quotes you a rate based on an inflated value the rate could increase or there could be an LLPA (Loan Level Pricing Adjustment) for LTV when the appraisal comes in lower leading to you paying points for the same rate. Tell them what you think is accurate so you get the most accurate quote for a rate and cost.

    I also think the advice from Tim is a bit over the top so no wonder it's confrontational.  Sure there are some appraisers out there that don't know what they're doing but "stable/increasing/decreasing" is a pretty basic part of the appraisal so asking about it is like asking if they are going to look at what other homes in the area are selling for, or if they're going to use their keyboard to enter data.  Yeah probably going to do those very basic things.  Also, your lender might tell you to pound sand trying to demand a new appraiser because you don't like their answers to those questions.  I order a lot of appraisals and can't remember a time an appraiser checked the "stable" box in a market like this because it would make them look incompetent and hurt their business. 

    If you can give the bank a 10% range pretty accurately you're going to be fine. And if you can live with the low range on that you're even better. 

    You are better off telling them a higher number. Appraisers have no incentive to estimate higher than you or the bank expects. The appraiser is told the loan value, so better to say $375K and get "disappointed" at $360K. 

    @Phillip Rosin The appraiser will likely have no idea what you listed on the bank's application as estimated value.  If you say estimated $350,000 and it actually comes back at $375,000 based on appraiser's report then the bank will use $375,000. I would stay conservative for your own expectations in how they're sizing your estimated loan terms based on the issues you list regarding comps. 

    When you apply the lender uses a neutral Management company to order the appraisal. NO none nothing of information as to the proposed or expected value is provided to the system (it is against the law). They have the appraisers on a digital list, they pick one nearby. A link is sent to you to pay for the appraisal and is charged on your card @Tim Cao is not exact in that you can just ask for a new appraiser. The Management company may not allow that as you as consumer are not allowed to pick and choose, also against the law. You can provide a written list of comparables that closed in past 3 months that are similar condition and size. Note any that closed but now are all cleaned up but were distressed with sold. There are not going to be as many comparables as say in the past 5 years on average as nationwide listings are way down. You need to provide all the facts BEFORE the appraiser meets you at the subject because by the time they show up to tape the house and take photos they already did their research. You can influence them with facts- compare view, lot size, interior condition, know your market. You say most recent sales are in rougher areas, pull the crime stats to prove this and traffic counts and anything like noise or worse schools... Can you comp a multi family in a luxury area nearby?  Look for ones 100 square feet larger with more privacy. 

    @Phillip Rosin   providing your lender with an estimate of market value really doesn't serve any purpose.  They will order an independent appraisal and unfortunately, based on some things you've stated, you might be in a market that's very difficult to appraise.  so be prepared to be disappointed.  Most people forget that the appraiser's CLIENT is the lender, not the borrower.

    It might be a good idea to reach out to a couple of appraisers in your area because lots of replies to your post contain incorrect info.  Most realtors and even most lenders and underwriters have no clue what process appraisers are required to follow.  Better to get info directly from the source vs. some other's opinion