Low Appraisal Let's Hear Your Suggestions
I am going to be brief here (it's nearing 1:00 AM) but let's hear from the pros what my options/plan of action should be.
Flipped a house. listed at $319,900 and it went under contract at $320,000 after 1 day. Had 4 showings, cancelled 4-5 and an open house that still saw a bunch of people. The house was going to sell very fast in the town it is in.
Appraisal comes in at $295,000. Buyer is putting over 20% down, conventional mortgage (no FHA or VA).
As I understand it, either I sell at $295k, buyer and I renegotiate with buyer bringing more cash, or the deal dies. I think $295k is low, but there are not a ton of comps around the house. I plan to run my own tomorrow, but want to hear from the pros. What would you do in this situation?
You should have let the house gone into multiples ... If you have multiple offers over the asking price, appraisers look at it differently in our heck of the woods. Get a copy of the appraisal. Go through it with the fine comb. Whats the effective age of the house? If rehab is a gut to the suds, with new siding roof, windows mechanicals and driveway - that should be compared to the new construction. Did appraiser miss a bedroom, bathroom, few hundred sq feet? Happened to me more then once. Look at every comp. Did he pull correct once? Are where better comps? Go wider, older - as long as you can make a compelling case .... You can always order and pay for another appraisal. Next time - meet appraiser at the door, comps and list of repairs in hand. Good luck
They can put 10% down (32k) on their loan and use the remaining 32k to satisfy the contract if it is truly going to go up in value in a turning market. Most of my sellers meet in the middle and work this out. In that case they could put 15% down and the remaining 5% could satisfy the new contract terms.
@Brian Pulaski Along with running your own comps which is step 1. You want to see what comps the appraiser used in their report. Do you know if the buyer is willing to give you their copy of the report? That is really the best way to challenge an appraisal. Show the bank "the appraiser used comps A, B, and C and actually D and E are more comparable to the subject property."
You hit on the biggest problem which is the lack of comparables. I've been in this situation multiple times as an investor and realtor and it is very frustrating. Do you have any contacts at the lender you can lean on by any chance?
@Dan Bryskin the house was more or less a complete rehab. Not 100% to the studs, but new roof, windows, siding, added a bath, updated the other baths, floors redone, new kitchen, opened a wall, etc. I do have a copy of the appraisal and plan to fine tooth comb it. It looks as though he adjusted up/down for everything on paper (SF, acreage, bed and bath count, etc) however there doesn't seem to be any adjustment based on the house having everything new, abs the comps don't appear to have been renovated. Thanks fiend the quick reply!
1. Dispute / try to raise the appraisal, per previous posts. Raise as many points per comp as you can. Blinds, door knobs, trees, corner lots ... Call some realtors on some pending stuff, see if you can scavenge better comps.
2. Can't get far with the appraiser, ask for his supervisor
3. Consider paying for another appraisal
4. If else fails, offer a buyer to carry back difference with little / no interest for a few years - not ideal, but better then taking a reduced profit
@Michael Noto I have the complete report.
As an update, spoke to the bank lending to the buyer and know what they will do (to an extent). Also spoke to the appraiser supervisor who stated he cannot speak to me. I have to submit my argument to the buyer, then they go to the bank, the bank hits a third party who gets it to the appraiser. I have done this however with the long weekend, sounds like nothing will happen until mid next week.
My house is a 1764 SF 3/2.5 colonial, top to bottom renovated.
What he compared was a non renovated colonial with a $140/SF sale, however did not adjust for renovations. A renovated cape with no garage for $173/SF, a newer but smaller colonial which sold for $193/SF, then two out of town houses (that town has a lower median sale price) at $183 and $186/SF. My house at asking price is $181/SF, at the lower appraisal $167/SF.
My personally run comps range from $313,000 to $380,000, with SF pricing between $176 and 189. These are all in town colonials from 1600 SF to 2000 SF and sold within a year. My average with adjustments made for my house (ups and downs based on the appraisers values) comes out to $335,000...
@J Scott I'll peak at the link when I find a few free minutes!
Originally posted by @Brian Pulaski:
I am going to be brief here (it's nearing 1:00 AM) but let's hear from the pros what my options/plan of action should be.
Flipped a house. listed at $319,900 and it went under contract at $320,000 after 1 day. Had 4 showings, cancelled 4-5 and an open house that still saw a bunch of people. The house was going to sell very fast in the town it is in.
Appraisal comes in at $295,000. Buyer is putting over 20% down, conventional mortgage (no FHA or VA).
As I understand it, either I sell at $295k, buyer and I renegotiate with buyer bringing more cash, or the deal dies. I think $295k is low, but there are not a ton of comps around the house. I plan to run my own tomorrow, but want to hear from the pros. What would you do in this situation?
You're going to drop price $6k, lender is to restructure it as 85% LTV. Deal will close without having to wait a week or two for a failed appraisal rebuttal, getting you out of your flipper hard money loan ASAP (which I assume is your goal at this point). Let me walk you through it...
Buyer wants to put down $64k, which is 20% of $320k.
85% LTV on $295k = $250k.
$250k + $64k = $314k.
You agree to drop price $6,000. "Meeting in the middle" in this scenario is a $12,500 price drop, so only having to drop it $6k is good for you. Buyer agrees to take on dirt-cheap PMI.
PMI with good credit @ 85% LTV will probably come in at 0.19%, which would be $39.58 per month. $39.58/mo should be well within the cushion any prudent lender builds in when they preapprove as far as DTI is concerned.
By contrast 95% LTV with bad credit would be 2.15% for PMI, which would be $250k * 2.15% / 12 = $447.91 per month. Buyer needs to see both numbers so they see that their PMI isn't the PMI with the bad reputation.
$6000 / $39.58 = 151 months, meaning that you're actually taking a bigger hit than them because it'll be at 80% LTV well before 151 months. Buyer needs to know this fact too.
The buyer is also only $250k in debt, not the $256k they would have been in debt @ 80% LTV on $320k. So they will net, when they sell, ballpark $6k more. And, incidentally, being $6k less in debt will save you about $30/mo, which is pretty damn close to fully offsetting that $38/mo that PMI came in at. This is the third fact they need to know.
Boom, done, mail me a six pack for saving your deal.
Took me all of 5 minutes to fix. This isn't unusual in the Bay Area.
Vette the lender before accepting an offer so you don't waste two weeks on easy stuff like this, which for you as a flipper probably means carrying costs on a hard money loan at 10% or something crazy.
@Chris Mason Lender will not do 85% as you posted above, they will only do 80%. Also I have no loan on the house. From what I am told the lender will not lend anymore than the 80%, and the buyer is on the hook to pay the rest to meet any negotiated price above $295,000 at this point. As best as I have been told by the other parties.
I can't add more than what J Scott gave you other than to point out a big mistake you should make sure you don't repeat. You cancelled showings and did not take multiple back up offers or cobtactveach lender for each buyer prior to accepting the one you took.
Next time, when you have that much activity, take every offer you can get and research each buyer and their lenders/agents. These back up offers can be presented to the appraiservto showvthere is not just one but multiple buyers willing to pay your price, thereby creating the market value.
Lastly, to reiterate, meeting the appraiser and walking the property with him R her is essential. I am always present myself, and I make friends with him inside of 5 minutes.
Originally posted by @Brian Pulaski:
@Chris Mason Lender will not do 85% as you posted above, they will only do 80%. Also I have no loan on the house. From what I am told the lender will not lend anymore than the 80%, and the buyer is on the hook to pay the rest to meet any negotiated price above $295,000 at this point. As best as I have been told by the other parties.
That's.... odd. Even if it's an investment property, SFR you can do 85% LTV.
Sadly I wa snot there, my wife was with him and he spent 20 of his 30 minutes there talking with her about medical school... she called and asked me questions for him, including what materials counter tops were and how HW was sent to the house. I was in NY during the appraisal, had to go last minute.
In hind site I agree on multiple offers and presenting that to the appraiser. I also do discuss buyers with the lender, however the buyer is very qualified, I'm just being told the bank does not lend over 80% (getting this info from the realtor).
Originally posted by @Brian Pulaski:
Sadly I wa snot there, my wife was with him and he spent 20 of his 30 minutes there talking with her about medical school... she called and asked me questions for him, including what materials counter tops were and how HW was sent to the house. I was in NY during the appraisal, had to go last minute.
In hind site I agree on multiple offers and presenting that to the appraiser. I also do discuss buyers with the lender, however the buyer is very qualified, I'm just being told the bank does not lend over 80% (getting this info from the realtor).
Are they a normal fannie/freddie lender, or is this some type of portfolio product?
Credit union. They wouldn't give a whole lot of information.
@Brian Pulaski, if the house is that hot would you have much trouble getting a new contract if you just put it back on the market?
Alternatively, could you or your agent recommend a good local lender to the buyers? You could even offer to cover the cost of the new appraisal that would be required by a new lender so they wouldn't lose anything. A good local lender will send an appraiser who knows their stuff. I've had appraisers come in from an hour away who were clueless about the area they were appraising. If your numbers are even close to accurate, an appraiser who knows the area will get you to the contract price or at least much closer.
Of course, the buyers have an incentive to not really do much with this. They've got an appraisal stating the house is worth $20k less than the contract price. If you don't want to put the house back on the market, they actually have a lot of leverage with that.
@Will Johnston I'm confident the house would sell quick when back on the market. There is not a lot of competition on renovated colonials in this price range, in this town. It is also a fairly desirable town to live in.
At this point the buyer has come up and put more money into the deal, but still not up to where the offer was (hard to blame her at this point, this appraisal is affecting her as well). At this stage it is less of a "hit" but again I still feel there is more money on the table.
I guess I decide if I keep my current buyer/bad appraisal or stick to a higher number, possibly lose the buyer and have to relist, or have the buyer argue the appraisal and push it back two weeks for them to review it.
This is investing though! Will make a fun lessons learned!
@Brian Pulaski You may want to consider offering to split the cost of a second appraisal with the buyer.
A lot of folk have offer a lot of suggestions. Personally backup offers and calling for highest and best is good in cases like yours just so you know who else is interested.
In my experience for Refi appraisals at least in Chicagoland area it is next to impossible to dispute and change value now a days. Used to be different but now a days it seems to be almost impossible once the appraiser puts out a value regardless of the facts. Unfortunately.
On flips we have done both. Reduced the price to match the appraisal and just closed on the deal. In some cases when we really thought that appraiser was wrong appeal it but put the property back on the market. Another buyer may come up with a much better appraiser that come in your favor. It's still is a gamble. We have done that and it has worked out in some cases.
Really it's going to be how confident you are in your values. I would consult with your agent or maybe call a couple agents that sell a lot in that specific area.
Did a lot of due diligence over the holiday weekend. Difficult due to most people not working. However I had a few real estate people confirm/deny some of my thoughts on the house value. The appraisers comps weren't good, however most of mine although in "town" were in a different section and not usable comps. I did find a couple other strong ones close to the house however weighed the negatives and positives of standing my ground. In the end the buyer came up and we agreed on a middle ground that made both parties happy.
Lesson learned to be ready at the appraisal!
Glad to see you found a resolution that worked for both parties. Any money left on the table at this point can be considered part your investment education costs. You will undoubtedly have more I'm sure. I have over a decade experience and still have real world education costs, aka learning lessons!