STR appraised $120,000 less than offer

Member since 2022 · 3 posts · 1 vote

Hello friends,

I am currently under contract with my first STR in northern Michigan. The location we chose will be a 4 season rental (skiing, snowmobiling, boating, fishing, golfing) with lake/dock access. Our offer was $260,000 (which we thought was close to value) but the appraisal came back at $140,000! What do we do?? A bit of a red flag I suppose.. The previous owners have had it for only months and they paid $220,000. There are comps in the $220's but 140k is still quite far from that even!
I think I’m dealing with a management company, is there a chance they would like to off load this property before year end even at a loss to avoid paying taxes and such?
Thanks in advance for your advice!

Jason

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

everyone is speculating about the appraiser here without enough info.

if the seller is basing the sale price on the STR income, and the appraiser is basing the appraisal on comps, there's no contradiction...

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Jason Smith
Member since 2021 · 109 posts · 130 votes
3y
@Jason Warner if they bought it a few months ago for 220K and the comps say 220K, why are you paying 260K? You should make your realtor show you the photos from MLS when it last sold if it was put on tbe market to see if any renovations were done. If there are no renovations I doubt an 18% increase in price is justified.
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Jason Smith
Member since 2021 · 109 posts · 130 votes
3y
@Jason Warner I would really consider if ypu realtor has your best interest in mind or a comission.
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Leslie Anne Morris
Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes
3y
I would order a new appraisal
1 Reply
Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3y
Either the appraiser is completely incompetent, or the seller over-paid for it as an emotional purchase and now they're trying to find a bigger sucker. I vote for the latter.
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Mike Smith
Boise, ID · Member since 2018 · 203 posts · 188 votes
3y
@Jason Warner I'm going to explain the basics of appraisals here, but it's a huge red flag that your realtor hasn't explained this to you.
1. Single family appraisals are based on comparable sales and are never based on the income approach (how much income the property generates as an investment property) and are never based on the cost approach (how much would it cost to build the home today).
2. The three required comparable sales have strict guidelines:
A. The subject house must be "bracketed" by the comparables in price. Ie, one comparable must be lower priced and one must be higher priced.
B. The subject house must be "bracketed" by the comparables in size. There must be one smaller in living SF and one larger in living SF.
To decide which comparables to use:
1. The lower the gross adjustment the better. Gross adjustments are adding up all the adjustments for differences between subject property and comparable property. Ie if the subject property has 2 bathrooms and the comparable has 3 bathrooms, the subject property value is adjusted -$3500.
2. The more recent the better.
3. The closer geographically the better.
People always say that appraisals are "half art, half science". The adjustments are 100% science. The only art is deciding which comparables use based on the (3) criteria above.
You can't dispute an appraisal unless:
1. There is a factual error. Ie, they wrote the SF as 2,000 SF and it's a 3,000 SF home.
2. They chose the wrong comparables, because you can prove your comparables are better based on the (3) criteria above.
My guess is the previous owner of your property overpaid for it based on wild elation in the STR market and your appraisal is much more realistic that you care to realize.
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James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
3y
@Jason Warner I am not hearing any information here about your agent in this transaction, are you working for your agent or is the agent working for you?!

Your agent is supposed to be "THE" Master of the deal, and this is an item that should never be on a buyer to sort. The agent should have 100% command of such a situation and be advising you for directions and options, with supporting information. Your position should just be as Executive Decision Maker, not trying to sort out the minutia of everything.

So Red-Flag for sure, but much more about your "team" or lack there of, then anything else.

I'd get on your agent BIG TIME, and if they just want to be a facilitator ok, but only getting a facilitators commission and I'd demand amendment to reflect.
In a situation like this I'd be talking with my buyer client how X-mas came early this year! And I would be beating the seller over the head with that $140k appraisal. I'd go for the throat, full shark-mode! I'd go for awesome terms, huge price reduction, closing costs, rate buy-down, turkey dinner, EVERYTHING. That's a golden ticket my friend, if your agent has a clue of what there doing.
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Tyler Fontaine
Property Manager · Member since 2022 · 196 posts · 125 votes
3y
So you definitely need a better realtor then. Thats a huge gap that needs to be covered. Kinda crazy you made it that far. You can offer the $140k and see if they bite. (Unlikely obviously) Regardless if you cant come to terms then you need to back out and get your deposit back.
That said, my next play would be to get the loan for the $140k and then have the seller hold a second note on the property to cover the difference. If they are willing to do this then there's a solid chance you can negotiate very good terms for yourself with them.
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Victor S.
WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
3y
dang, so many people don't go past the OP... i hope y'all read your contracts better than this.
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
3y
Don't buy it! Unless its a 5+ building the rents from airbnb do not affect value. It's a small niche of people willing to buy off income for non 5+ buildings and not how you value them.
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Brad S.
Investor · Pasadena, CA · Member since 2017 · 612 posts · 523 votes
3y
The Appraisal may be far off or you may be equating "business value" with the "real property" value. An str has value beyond it's real estate, it is a hospitality business, not a real estate business, real estate is only a part of it. And unless the appraisal is a business appraisal (which I doubt it is), it is possible that it reflects only the real property value and not the business. The comps used may have reflected real estate transactions and not business transactions.
But, then again, it could be just a bad appraisal. :/
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Aaron Gordy
Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
3y
Get them to go down to the appraised value or walk.
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Aaron Gordy
Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
3y
@Mike Smith You can dispute an appraisal. I have disputed so many appraisals its not even funny. As long as you provide facts (better comps) and logical reasoning why your comps are better that is well grounded then you have a reasonable chance. Appraisals are by definition an opinion of value.
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Ricardo R.Pro Member
Property Manager · Michigan Ctr, MI · Member since 2016 · 661 posts · 581 votes
3y
@Jason Warner yeah sounds like a bad appraisal. You should order another appraisal. The Seller wants $260k - they paid $220k highly unlikely, not impossible but highly unlikely that the Seller will go even below $220k with you. I mean everyone saying $140k is your new negotiation point is delusional. Put yourself in the Sellers shoes… if a buyer is wanting a $120k discount and screaming at the top of their lungs that that’s what it’s worth… wouldn’t you as a Seller just then take the chance and let you go on your merry way and immediately drop the price by $5k, $10k heck even $30k ? Their agent would surely advise them to and I would advise them to do that as well as their agent.
A low appraisal can be a negotiation tool but a bad appraisal such as this…. is worthless because you both know it’s worth more. You obviously know it’s a low appraisal and you are obviously okay with paying $260k for the property, now I’m not saying to massively overpay for the thing but how would you feel if the Seller just laughed at your counter of $140k and instead just dropped the price to $239k and it flew off the shelf? Because I’m telling you that’s exactly what will happen, heck the Seller might not even get any bites at $239k and may drop it again… what I’m saying is that there many many many more stops and options to the seller before they just hand a $140k discount… but hey I’m just a guy and anything’s possible.
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
3y
Quote from @Ricardo R.:

I mean everyone saying $140k is your new negotiation point is delusional. Put yourself in the Sellers shoes… if a buyer is wanting a $120k discount and screaming at the top of their lungs that that’s what it’s worth… wouldn’t you as a Seller just then take the chance and let you go on your merry way and immediately drop the price by $5k, $10k heck even $30k ?
The seller will likely just wait for a cash buyer to come along.....
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
3y
Quote from @Jason Warner:

Quote from @Nick Velez:

@Jason Warner
The appraisal sounds like it is massively under value and might be a case of an incompetent appraiser. You could challenge it, but I think its very unlikely that the appraiser will come up enough to make a difference. I think your best bet is having your broker pivot this file to another lender and order another appraisal. We have had instances where an out of area appraiser appraises a property for significantly under value, and we order a new one and have a 200k increase in the appraised value.
Got a call today from my lender stating that the appraiser mis-reported a few items (he/she recorded it as a 1 bedroom vs 2 bedroom + loft & pulled comps from 2012 that aren’t even relevant). We believe the findings are inaccurate and ordered a new appraisal in hopes of capturing a more “honest” approach.

Sounds like the appraiser needs to do a better job. Hopefully you get a more accurate appraisal. I'd also be worried about them selling the property so quickly.
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Ricardo R.Pro Member
Property Manager · Michigan Ctr, MI · Member since 2016 · 661 posts · 581 votes
3y
Quote from @Bruce Woodruff:

Quote from @Ricardo R.:

I mean everyone saying $140k is your new negotiation point is delusional. Put yourself in the Sellers shoes… if a buyer is wanting a $120k discount and screaming at the top of their lungs that that’s what it’s worth… wouldn’t you as a Seller just then take the chance and let you go on your merry way and immediately drop the price by $5k, $10k heck even $30k ?
The seller will likely just wait for a cash buyer to come along.....

@Bruce Woodruff for sure, that's definitely one of endless the options available to the Seller at an ask of that much of a discount.

[email protected]810-844-1104
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David GoodmanBusiness Member
Realtor · Nashville, TN · Member since 2020 · 172 posts · 92 votes
3y
I just had an appraiser come back $114k less than asking price price on a cash flowing quad in west nashville. First time it's happened in 2 years for me.
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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
3y
Quote from @Gurbeer Sangha:

Try and have the appraisal appealed and reappraised.
If that does not work, you might want to look into a DSCR loan to get qualified through expected rent. In that case, the value of the house is irrelevant, it's about the ratio of monthly payment to rent.

This post could not be more wrong. The value of the house is ALWAYS relevant. DSCR stands for Debt Service Coverage Ratio. The basis of the ratio comes from the total of the mortgage which correlates to the value of the property.

@Jason Warner You should still have a couple of options. If the appraisal came back at $140,000 you can dispute it, but know that the appraiser will not give you $220,000 and renegotiate the sales price. Knowing that that would be a waste of time, you roll the dice and ask the broker to send it to a different lender. You would have to pay for a new appraisal in this scenario. The only other option is to exercise your appraisal clause or financing clause and walk away. Hopefully you have one or the other.
All the best
Stephanie
Stephanie
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Patrick Britton
Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes
3y
so many of you ASSUME it's the appraiser. why? Why is it not the realtor's fault? and maybe it's not a "fault" at all but a warning to NOT BUY!!!

Seriously, if an independent, unbiased third party who works FOR THE LENDER is saying you are overpaying, maybe you are!?!?! Just because someone else paid $$$ a few months ago doesn't mean anything.
Appraisers do not care what you paid.
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
3y
@Patrick Britton might have a very good point....
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