My flip house didn't meet appraisal - what are my options?
Investor · Murphy, TX · Member since 2011 · 189 posts · 86 votes
My flip house didn't meet appraisal - what are my options?
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Investor · Salem, OR · Member since 2020 · 30 posts · 28 votes
6yThere are a variety of things you can do in a situation like this:
1. Send the comps that you and your realtor have that you feel support the value.
2. Send a comprehensive list of the improvements and the costs to the appraiser. You want what you purchased the home for plus your improvements to come as close as possible to the sales price.
3. Bite the bullet and accept the offer with the minimal required repairs. (By the way, inspections are often a total joke. But if there are major things required, it could mean that you missed something you shouldn’t have. Something to be aware of on future projects.)
Lastly, I don’t think I would kill the deal with these buyers. First, you’re most likely going to run into these issues with another buyer. But more importantly, I have learned through many years of doing this.... take the offer you have. Killing a deal in hopes of getting a better offer when selling your properties rarely works out in the long run.
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- Investor · Salem, OR · Member since 2020 · 30 posts · 28 votes6y
There are a variety of things you can do in a situation like this:
1. Send the comps that you and your realtor have that you feel support the value.
2. Send a comprehensive list of the improvements and the costs to the appraiser. You want what you purchased the home for plus your improvements to come as close as possible to the sales price.
3. Bite the bullet and accept the offer with the minimal required repairs. (By the way, inspections are often a total joke. But if there are major things required, it could mean that you missed something you shouldn’t have. Something to be aware of on future projects.)
Lastly, I don’t think I would kill the deal with these buyers. First, you’re most likely going to run into these issues with another buyer. But more importantly, I have learned through many years of doing this.... take the offer you have. Killing a deal in hopes of getting a better offer when selling your properties rarely works out in the long run. - Investor · Salem, OR · Member since 2020 · 30 posts · 28 votes6y
Originally posted by@Andrew B.:
In addition to what Matt said, you can also ask buyers to make up the price difference. However, functionally, that's almost the same as dropping the price and getting rid of the $5k credit.
Possibly, but if they are getting an FHA loan, they are sometimes not allowed to purchase the home for more than what the appraisal is.
Appraisers are such an antiquated function of real estate. Buyer's agent works their tail off to find a buyer their dream house, seller's agent runs people in and our of seller's house, seller wants to sell, lender works their tail off to get the loan done - and then it goes to the desk of a randomly generated 3rd party whose opinion makes or breaks the deal. It's ridiculous.
Even worse, the FHA appraisal stays with your property for 4 months, so no other FHA buyer can purchase your house if they wanted to. And if you dispute the appraisal, guess who looks at it - the same appraiser! So the only way this number is going to change is if the appraiser admits they mailed it in the first time, they have 0 incentive to admit their mistake.
This is how many deals die, luckily you're not too far off and should figure something out. We've had appraisals come in 40k too low, after receiving multiple full price offers above asking price. Imagine the ego that guy had to think he was that much smarter than us (the seller), a dozen buyers, and a dozen buyer's agents.
- Real Estate Investor · Clovis, CA · Member since 2014 · 195 posts · 194 votes6y
@Nick C. Nick gave great advice above. Take a conventional offer over FHA when possible, the appraisals seem to come in easier.
Because of these kinds of situations, my agent started meeting the appraiser at the property with comps. to justify the price. (It is so much better to get it to come in at or above the sale price, than to try and fix it later). She tries to do it every time now and it really makes a difference. (She is great at building relationships and comes off as just trying to help, and most appraisers appreciate it).
- Rental Property Investor · Woodstock, GA · Member since 2017 · 517 posts · 772 votes6y
Originally posted by @Mark Freeman:
Because of these kinds of situations, my agent started meeting the appraiser at the property with comps. to justify the price. (It is so much better to get it to come in at or above the sale price, than to try and fix it later). She tries to do it every time now and it really makes a difference. (She is great at building relationships and comes off as just trying to help, and most appraisers appreciate it).
Yeah, do what Mark recommends.
Unfortunately, you don't seem to have a great selling agent.
A house listed for $250k and $5k in buyer credit is ultimately a $245k sale.
No appriaser is going to tank a sale by $2k.
Appraisers are lazy...if you give them comps and show your repairs, they'll usually fold.
- 6yJoseph ODonovanPro MemberProperty Manager · Ridley, PA · Member since 2017 · 427 posts · 449 votes
@Bill Hinshaw Make this deal work, you're only a few grand off. Negotiate with buyer by meeting somewhere in the middle. What are your monthly holding costs ? If this buyer walks, you are back at square one. The credit markets are tightening up, buyers may be a bit leary today with the uncertainty facing the economy. I would not let that fish off the hook. Good luck.
- Investor · Murphy, TX · Member since 2011 · 189 posts · 86 votes6y
Thanks guys. Really appreciate all the feedback. A few more details to add…
We have had major execution problems on this house. Where we stand now is this: we either sell the property for a very small profit, get back to cash and move on to bigger/better projects, or we keep the house as a rental. The appraisal issues aren’t so much about us wanting a better offer and more profit, it’s just another nudge pushing us towards keeping the house.
Also, I’ve learned the buyer cannot close without help at closing. So while the delta from appraisal is only 2k under normal circumstances, it will actually work out to be more than that. I had agreed to do some repairs after the buyer’s inspection, and now I’ve got additional repairs required by the lender. We will have to re-negotiate repairs to make this work.
My wife is our agent, and she did prepare a comparable sales packet for the appraiser.
I’ve learned some interesting things from reviewing the appraisal. The major issue is that the 3 comps the appraiser used to determine the value are all smaller than ours. When he added an adjustment to account for the size differences, he only valued the additional square footage at $40/sq ft. Comparable homes are selling at $150/ sq ft. Build cost at a minimum is $95/sq ft. Even if the appraiser had just used build cost at $95/sq ft, our property would have appraised at > 250k. There is already a separate adjustment for age of the house, so I don’t think this is a depreciation issue. I don’t know how the $40/sq ft is justified.
My wife and I prepared a packet over the weekend to challenge the low adjustment for additional sq ft. We also provided another comp that would work more in our favor, and is justifiable (better reflection of age and size of our house compared to one of the other comps). We’re trying to give the appraiser some “options to consider,” as well as being very careful with how we word our critique of his work. We’ll see where it goes.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
Originally posted by @Bill Hinshaw:
Thanks guys. Really appreciate all the feedback. A few more details to add…
We have had major execution problems on this house. Where we stand now is this: we either sell the property for a very small profit, get back to cash and move on to bigger/better projects, or we keep the house as a rental. The appraisal issues aren’t so much about us wanting a better offer and more profit, it’s just another nudge pushing us towards keeping the house.
Also, I’ve learned the buyer cannot close without help at closing. So while the delta from appraisal is only 2k under normal circumstances, it will actually work out to be more than that. I had agreed to do some repairs after the buyer’s inspection, and now I’ve got additional repairs required by the lender. We will have to re-negotiate repairs to make this work.
My wife is our agent, and she did prepare a comparable sales packet for the appraiser.
I’ve learned some interesting things from reviewing the appraisal. The major issue is that the 3 comps the appraiser used to determine the value are all smaller than ours. When he added an adjustment to account for the size differences, he only valued the additional square footage at $40/sq ft. Comparable homes are selling at $150/ sq ft. Build cost at a minimum is $95/sq ft. Even if the appraiser had just used build cost at $95/sq ft, our property would have appraised at > 250k. There is already a separate adjustment for age of the house, so I don’t think this is a depreciation issue. I don’t know how the $40/sq ft is justified.
My wife and I prepared a packet over the weekend to challenge the low adjustment for additional sq ft. We also provided another comp that would work more in our favor, and is justifiable (better reflection of age and size of our house compared to one of the other comps). We’re trying to give the appraiser some “options to consider,” as well as being very careful with how we word our critique of his work. We’ll see where it goes.
How long has your wife been an agent, or how many homes does she sell? When a home doesnt appraise, I typically believe it is because the listing agent failed to do their job well. Theres a reason why the top agents dont have appraisal problems while those less experienced agents often do.
District Invest Group545 Reviews - Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes6y
Also remember, this appraisal will stick to the house for 6 months for fha, so any other fha buyers will have this appraisal number.
- Investor · Murphy, TX · Member since 2011 · 189 posts · 86 votes6y
@Russell Brazil We've been doing this for 5 years. This is our first lower end house and our first time selling to an FHA buyer. Is it common knowledge among agents that FHA appraisals only value additional sq ft at less than half of build cost? Have you seen this before?
If it is common knowledge, I would assume it would be a common practice for agents to make sure and provide comps that are mostly larger in size for FHA appraisals, so that the adjustment for size works in the seller's favor. Is this what happens?
Or did our appraiser just happen to use a ridiculously low number, and this isn't a common practice?
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
Originally posted by @Bill Hinshaw:
@Russell Brazil We've been doing this for 5 years. This is our first lower end house and our first time selling to an FHA buyer. Is it common knowledge among agents that FHA appraisals only value additional sq ft at less than half of build cost? Have you seen this before?
If it is common knowledge, I would assume it would be a common practice for agents to make sure and provide comps that are mostly larger in size for FHA appraisals, so that the adjustment for size works in the seller's favor. Is this what happens?
Or did our appraiser just happen to use a ridiculously low number, and this isn't a common practice?
We do not use cost per square foot in the midatlantic. (Althought they do in Massachusetts where I do some business)
You should always have a variety of comparable, those that are spot on, and those that are purposefully high, with acknowledgements of when you are going through the comps with the appraiser, that x property may be high. That dialogue builds in trust, It also gives the appraiser a higher dollar comp to adjust down from. If they are going to be intent on adjusting down from a comp, you want it to be one priced high as opposed to spot on.
You also want to always be cautious with FHA, because the appraisal is going to stick with the property for months. There are also the required repairs that will come along with an FHA (as well as VA) appraisal.
District Invest Group545 Reviews - Investor · Murphy, TX · Member since 2011 · 189 posts · 86 votes6y
@Russell Brazil The appraiser didn't specify a cost/sq ft. I'm doing that. I would assume all appraisals have some adjustment for size differences in the comps, right?
The appraiser basically said comp A is 170 sq ft smaller, so I'm going to adjust the price by $7000 to reflect the additional sq ft of the subject house. That math works out to $41/sq ft. That is an extremely low value, and it was consistent across all 3 comps (the range was $38 - $41). Where does that come from? Is that common knowledge?
My wife provided comps for houses in the immediate area that had been renovated, that matched the quality of materials in our house, and were of similar age. He only used 1 of them. Still, the comps used aren't really the issue. They should have worked if he had valued the additional sq ft of our house at an appropriate value.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
Originally posted by @Bill Hinshaw:
@Russell Brazil The appraiser didn't specify a cost/sq ft. I'm doing that. I would assume all appraisals have some adjustment for size differences in the comps, right?
The appraiser basically said comp A is 170 sq ft smaller, so I'm going to adjust the price by $7000 to reflect the additional sq ft of the subject house. That math works out to $41/sq ft. That is an extremely low value, and it was consistent across all 3 comps (the range was $38 - $41). Where does that come from? Is that common knowledge?
My wife provided comps for houses in the immediate area that had been renovated, that matched the quality of materials in our house, and were of similar age. He only used 1 of them. Still, the comps used aren't really the issue. They should have worked if he had valued the additional sq ft of our house at an appropriate value.
No, all appraisals do not have adjustments for minor differences in square footages. If your locale sells houses on a price per sq foot basis then they might. But if you are in a locale that does not use per square foot costs, then minor differences in square footage would have no impact on value.
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