We bought a property for 70 k. and rehab for 15k. So total in was 80k We then hired our own appraiser who appraised it for 120k. We then went to the Bank for a  cash out refi , they appraised it for 85k. What should we do 

You could start asking questions about the appraisal. Sounds like you're in the hole for two appraisals thus far. Banks usually come in low from my experience but not $25K low. Worst case you call another lender. They don't all speak the same language with real estate values, terms, and rates.    

You can get it re-appraised and get the report questioned by a superior. Alternatively you can switch to another lending institution and start the process again for higher ARV and appraisal.

@Dilini Peiris

I did a deal some years back, with about the same numbers as you. Bought it as a pre foreclosure for $70K, needing rehab, with an ARV of $130K. Flipped, and a buyer had it under contract, got a mortgage, with an ARV of $130K, and the mortgage was 75%, around $97K. What happened? He dropped out, lost his job couldn't close. I wind up having to close.

So I went to the mortgage company, and they will not go by the appraised value of $130K, and the fact that I have a signed contract from a buyer, $13K deposit collected doesn't count either. They will only go on the basis of what my contract is, what improvements I put in which is $85K. They finally gave me a $75K mortgage taking into consideration closing costs, a big favor. This was back in 1985, and interest rates were 13%. I was told I can refi out after two years, and based on lending policies, that's all I'm going to get.

End result? Turned out well for me as with those interest rates, I'll negatively cash flow for several years. At $75K, I'll break even. I still have the property after all these years, now ARV $485K earlier this year, now approaching $500K, and mortgage free.

The market crashed in 1986, and hit bottom in 1993, when I refinanced. Interest rates dropped for 13% to 7.5%. Unfortunately, at that time, with DTI issues, I can only get a mortgage of $80K. Turned out I was able to cash flow very well with $80K mortgage at 7.5% compared with zero cash flow initially.

@Frank Chin Talk about a roller coaster ride! I wasn't even alive yet. That's one heck of a retirement fund :-)

I would give a mortgage broker a call and tell him what you are looking for.

Banks always appraise low.

Originally posted by @Jaron Walling :

@Frank Chin Talk about a roller coaster ride! I wasn't even alive yet. That's one heck of a retirement fund :-)

Can't agree more, real estate is a great way to fund retirement, and this was one of my great deals. I'm retired now and my rental income is greater than my social security and pensions. Don't even need to touch my IRA's or 401K's.

My dad invested in a mixed use property, with two stores, 4 garages, and one large apartment. Bought it in 1963 for $25K, $10K down, paid off in 1980, when he retired, then a few years before he collected social security. So rent from one property funded his entire retirement. My parents passed in 2015, the mortgage free property was sold for a little under $1.2 million. Imagine, investing $10K in real estate, pay off the mortgage in under 20 years, retire, live comfortably for over 30 years in retirement, with over a million left over.

Yep, investing in real estate, you can have a great retirement, and leave a bundle for your kids.

Bank appraisals are BS. Period. I paid for 2 when trying to refi a place in 2012, both of them deliberately misstated the sq ft to make their number come in to what "their gut" told them was right. One by 15% and the other by 20%!  This was not an 'honest mistake', I held the tape measure for one of them. It's a 3U rowhouse with a single floor extension, you need 4 number to get it right. They lied. This was literally criminal, they took my money and did not give honest service. The banks said 'tough' when I explained the obvious error. 

@Frank Chin Love It!

My game plan, God willing!

A friend was going on about shifting 401k into a target based fund and I am just looking at the guys saying to myself, "eff that, bring on the volatility and gains of an equity- I may never have to touch it!" Bonds? My SS and pension are my bonds!

Great reminder for us all 👍 thanks!

@Dilini Peiris like it or not, here is their logic. The property just sold for $70K, so at the time of sale, market value was $70K. You improved the property by $15K after the sale, so now it is worth $85K. 

Each bank has to hire their own appraiser and it is usually randomized. This is a difficult situation, because appraisers hate to be challenged. You are basically telling them they did their job wrong. I would probably start by reaching out to the appraiser who came to the $120K value. Give them a copy of the $85K appraisal and ask for their help. The key is either finding higher value comparable or pointing out flaws in their adjustments. 

You need to be non confrontational with the appraiser. Maybe start out by explaining you hired your own appraiser before going to the bank, to make sure of value. Share a copy of the report with them. Ask if it is possible they missed some property details or better comparable properties. Use any suggestions your first appraiser gives you. In a perfect world, your first appraiser knows the second appraiser and can influence them. 

thanks everyone for your response. Frank Chin, our goal is to do exactly what your dad did...God willing:). 

the bank apparently looked at a few houses that were sold within 6 months 85k-95k range ( but not sure how they came up with an 85k average). So we did forward more comps in the area with a higher sale price matching our house #beds and #bathe and square footage. Ours is 4 bedroom, but the Bank looked at all 3 bedrooms..(???) We also sent a copy of our appraiser's report. Fingers crossed. This is the first rental we BRRRR'd so it's definitely disheartening:(

In this aspect there're two possibilities:
1. the First appraiser may be overestimated because they're your client
2. the second appraiser maybe underestimate the rehabs that you did

It's hard to make a call unless we can differentiate line by line between the two appraisal. It shall not be too hard to find out what's the difference.

Did the bank appraiser go inside the unit to see the renos? I know sometimes they appraise without even visiting

@Dilini Peiris

My last BRRRR, bank did a DESKTOP appraisal and it appraised for $75K. I requested a full appraisal ( walked premise inside & out). I also met appraiser @ property with a list of comps that recently sold along with a printout of all updates done to the house with expenses. Appraisal came in @ 155K.

Best of luck

did the bank do a full appraisal or a desk top appraisal?  make a difference, one is much less detailed.  

@Dilini Peiris Going through something similar right now as well. You can try a different bank. You can contest the appraisal with the current bank. You can accept the terms and move on to the next deal.

Key point is learn from it, make a decision regarding it and move forward with your goals anyway. Good luck.

Desktop appraisal... yeah no thank you. Haven't experienced that one yet (knock on wood).