Unexpected low appraisal

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Unexpected low appraisal

Member since 2022 · 13 posts · 1 vote

Hello community. I recently purchased a renovated townhome to hold and rent. I negotiated $17.5k off the asking price of $147,500 in hopes to get an appraisal value in that range to be able to finance with little to no money in the game. I really didn’t understand the appraisal process until after receiving the low value. I noticed in the report that none of the rehab was considered in the estimate, especially when looking at the comps the appraiser used. He valued the conditions as average, where all are new. Updating is as follows: Flooring is new wood(living room and 2nd bedroom), carpet (stairs and master bedroom), and ceramic tile (entry, kitchen, and master bath). New cabinets in kitchen and bath with quartz countertops, walls were textured and painted, fireplace has new brick facing.

Is there any recourse to get the appraisal to come up to the $155k range? Will the appraiser take into consideration the updates done if made aware of them and resubmit his value? Or is all this a waste of time?

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Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

The time to submit information, comparables is BEFORE the appraiser goes out. You should have supplied a list of three to four sales in past three months with same square footage and condition. Residential appraisers do not look at ARV so your loan officer failed you when they did not ask enough questions.

Average condition means average materials used appropriate for the market. Paint zero value. Carpet zero value add. Now maybe if your comps have old linoleum counters that are peeling vs gorgeous quartz there might be a $1000 adjustment up there. Remodel costs do not equal adding to value.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
4y
Quote from @Todd McFarland:

Hello community. I recently purchased a renovated townhome to hold and rent. I negotiated $17.5k off the asking price of $147,500 in hopes to get an appraisal value in that range to be able to finance with little to no money in the game. I really didn’t understand the appraisal process until after receiving the low value. I noticed in the report that none of the rehab was considered in the estimate, especially when looking at the comps the appraiser used. He valued the conditions as average, where all are new. Updating is as follows: Flooring is new wood(living room and 2nd bedroom), carpet (stairs and master bedroom), and ceramic tile (entry, kitchen, and master bath). New cabinets in kitchen and bath with quartz countertops, walls were textured and painted, fireplace has new brick facing.
Is there any recourse to get the appraisal to come up to the $155k range? Will the appraiser take into consideration the updates done if made aware of them and resubmit his value? Or is all this a waste of time?

U can always challenge the appraisal they rarely get changed though.. although only being off 7k does not seem like that big of deal..
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
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@Todd McFarland
What is the purpose for fighting the appraisal?
The lender looks at the lower of the appraisal or price paid. In this instance it looks like you paying around $130k for the property was lower than the appraisal so a higher appraisal will not change the banks terms.
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Caroline Gerardo
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
4y
The time to submit information, comparables is BEFORE the appraiser goes out. You should have supplied a list of three to four sales in past three months with same square footage and condition. Residential appraisers do not look at ARV so your loan officer failed you when they did not ask enough questions.
Average condition means average materials used appropriate for the market. Paint zero value. Carpet zero value add. Now maybe if your comps have old linoleum counters that are peeling vs gorgeous quartz there might be a $1000 adjustment up there. Remodel costs do not equal adding to value.
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Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Chris Seveney:

@Todd McFarland
What is the purpose for fighting the appraisal?
The lender looks at the lower of the appraisal or price paid. In this instance it looks like you paying around $130k for the property was lower than the appraisal so a higher appraisal will not change the banks terms.

My goal was to enter into this property with $0 from me. I comp’ed the property, or so I thought, to be in that range that would allow me to reach my goal. I was unaware that the appraiser went in with your purchase price as the basis. I assumed they would base the appraisal on market price, not negotiated price. My mistake, but i would have passed on the property if I knew this upfront. I can still cash flow on the property but now will have money tied up for a couple of years
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
4y
@Todd McFarland there's several nuances to what you are asking.  Let's cover a couple of things:
1. Loan Type - Do you know what type of loan you are getting? Meaning, a Fannie/Freddie type of loan will require a down payment no matter what the appraised value is. So if your down payment requirement is 15% down - that's 15% down whether the home appraises for $147k or $155k. Most "permanent" loans are structured in this fashion. A loan like a Hard Money Loan (HML) will be based on the ARV of the property. Those usually lend 75% of the ARV. So if you can buy and rehab at 75% of the ARV, then you could come out of pocket with $0. It's kind of hard to do it like that but that's the concept of it at least. Your loan type will determine what the right course of action here is.
2. Value - this is something that is very important to understand. In your appraisal there should be some "definitions" or "key" that will define certain ratings.  Usually C3 means that SOME of the parts of the property have been replaced. C2 = ALL have been replaced. C1 = entire property is brand new. So if your comps are all C3 and the appraiser is giving you that same condition rating, that's pretty good.  The only way to get value higher is if your comps show higher value.  To formally contest the value you would need to show comps that are more similar to your property than the comps in the appraisal.
3. Lender - Now, it sounds like you in are process of a loan with a lender - do I have that right?  Your lender should be able to answer all of these questions better than any of us can because they can see the information that I am asking you about. Lean on them for these answers...hopefully they know what they are doing.
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Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Caroline Gerardo:

The time to submit information, comparables is BEFORE the appraiser goes out. You should have supplied a list of three to four sales in past three months with same square footage and condition. Residential appraisers do not look at ARV so your loan officer failed you when they did not ask enough questions.
Average condition means average materials used appropriate for the market. Paint zero value. Carpet zero value add. Now maybe if your comps have old linoleum counters that are peeling vs gorgeous quartz there might be a $1000 adjustment up there. Remodel costs do not equal adding to value.
I mentioned the updates because the comparable he used were all builder grade and looked original. I had anticipated the upgrades to factor into the appraisal, which by his scoring of C4, but were overlooked. Should have rated as a C2 (full renovation) which would of added approximately $10k to the value. On the quality score of Q4, the house is a high end Q4 because it does not have any builder grade finishes.

Please school me, that’s why i am here! Thanks
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Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Andrew Postell:

@Todd McFarland there's several nuances to what you are asking.  Let's cover a couple of things:
1. Loan Type - Do you know what type of loan you are getting? Meaning, a Fannie/Freddie type of loan will require a down payment no matter what the appraised value is. So if your down payment requirement is 15% down - that's 15% down whether the home appraises for $147k or $155k. Most "permanent" loans are structured in this fashion. A loan like a Hard Money Loan (HML) will be based on the ARV of the property. Those usually lend 75% of the ARV. So if you can buy and rehab at 75% of the ARV, then you could come out of pocket with $0. It's kind of hard to do it like that but that's the concept of it at least. Your loan type will determine what the right course of action here is.
2. Value - this is something that is very important to understand. In your appraisal there should be some "definitions" or "key" that will define certain ratings.  Usually C3 means that SOME of the parts of the property have been replaced. C2 = ALL have been replaced. C1 = entire property is brand new. So if your comps are all C3 and the appraiser is giving you that same condition rating, that's pretty good.  The only way to get value higher is if your comps show higher value.  To formally contest the value you would need to show comps that are more similar to your property than the comps in the appraisal.
3. Lender - Now, it sounds like you in are process of a loan with a lender - do I have that right?  Your lender should be able to answer all of these questions better than any of us can because they can see the information that I am asking you about. Lean on them for these answers...hopefully they know what they are doing.
1. Loan is a commercial loan. Max is a 85% LTV.

2. The appraiser scored it as a C4, and he made a note that the kitchen and bathroom were updated at 6 to 10 years ago. The entire interior is new with high end finishes. Also rated the quality as Q4, which by definition, it mostly fits that grading except the “builder grade”. It would deserve a mix value since it is above “stock standards”

3. I do have a lender and they supplied me with the appraisal document. I have reached out to discuss but waiting for a return call from the lender and the appraiser.
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Jon Martin
Member since 2022 · 1k+ posts · 1k+ votes
4y
it’s always worth appealing but at the end of the day, you are telling someone they did their job wrong and hoping that they will acknowledge that and rule in your favor. Good luck with that.

Otherwise, the seller will probably try to hold their ground but if the property has been listed for a while, there is a good chance they will give in for the sake of closing the deal and not having to go through the whole process again. If they really seem stubborn, offer a few K so that they feel like they are getting something.

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Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Jon Martin:

it’s always worth appealing but at the end of the day, you are telling someone they did their job wrong and hoping that they will acknowledge that and rule in your favor. Good luck with that.

Otherwise, the seller will probably try to hold their ground but if the property has been listed for a while, there is a good chance they will give in for the sake of closing the deal and not having to go through the whole process again. If they really seem stubborn, offer a few K so that they feel like they are getting something.

Maybe I am not communicating clearly. I have a signed contract for the purchase price of $130k. The original listing was for $147,500. After several rounds of offers/counter offers, we agreed at the price of $130k. I sent my contract to the lender, which in turn ordered an appraisal to get the value. After thorough research with my real estate agent, who provided comps, that would place the property close to where I needed it to take out an 85% LTV loan. When I received the appraisal, I was a bit disappointed. After reading through the document, I see several mistakes or overlooked items that could improve the value, which would lower my entry fees. Goal is to be $0 from me, but this one looks like I will need to bring about $17k to closing.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
4y
If I know the address, I can guess the appraisal. The C4 is usually at the low 30-40% percentage of the range. These days most appraisals are just almost likely following automatic software valuation, automation valuation software has a range and C4 definitely is low to medium.

Nowadays higher bids happen not because of the quality of the house but to get selected from the competition. Now since most appraisal uses list/sold value from 6-12 months ago, that's where the potential gap is. That's why expect to wait for at least 13 months to catch up with the market.
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
You always need a certain percent down. If it appraised for $500k they wouldn’t borrow you $400k (80%) if you we’re buying it for $130k. The most you can borrow is a percent of the purchase price or that percent of the appraisal, whichever is LOWER. That percent should be in your loan dox.
The only time the appraisal matters is when it’s lower than the purchase price. Then you need to bring that difference in “cash” in addition to your downpayment.
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
4y
Quote from @Todd McFarland:

Quote from @Jon Martin:

it’s always worth appealing but at the end of the day, you are telling someone they did their job wrong and hoping that they will acknowledge that and rule in your favor. Good luck with that.

Otherwise, the seller will probably try to hold their ground but if the property has been listed for a while, there is a good chance they will give in for the sake of closing the deal and not having to go through the whole process again. If they really seem stubborn, offer a few K so that they feel like they are getting something.

Maybe I am not communicating clearly. I have a signed contract for the purchase price of $130k. The original listing was for $147,500. After several rounds of offers/counter offers, we agreed at the price of $130k. I sent my contract to the lender, which in turn ordered an appraisal to get the value. After thorough research with my real estate agent, who provided comps, that would place the property close to where I needed it to take out an 85% LTV loan. When I received the appraisal, I was a bit disappointed. After reading through the document, I see several mistakes or overlooked items that could improve the value, which would lower my entry fees. Goal is to be $0 from me, but this one looks like I will need to bring about $17k to closing.

So you paid $130k and as best as I can tell it appraised at about $135k since you have to cover 15%. I'm assuming someone else did these rehab things since you haven't closed yet.

Generally, no. When you are purchasing you shouldn't be surprised that the appraisal comes back more or less at what you paid, because you are part of the market. IE the appraisal is supposed to be essentially a fair market value for the bank to know they're not overpaying for the note. When you negotiated it down to $130k your contract essentially says "A townhouse with new cabinets in the kitchen and bath and new brick facing on the fireplace and new wood flooring in the living room is worth $130k". If it was worth $155k then what you are wanting an independent appraiser to believe is that the seller, of no relation to you, is willing to forgo $25k worth of value (almost 20% of the sales price) of the place because S/he wants to sell it so bad.

Now you can come back 6 months from now, show another bank (or yours, perhaps) all the improvements and try for a better price, and refinance your cash back out of the deal. That's pretty common, if you don't mind eating the closing costs.

I would say that leaving $17k behind isn't bad at all, honestly. The property should have nice cash flow anyway or it doesn't make a difference how much you are clearing, so assuming it does it doesn't sound like you've lost out here.
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Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Carlos Ptriawan:

If I know the address, I can guess the appraisal. The C4 is usually at the low 30-40% percentage of the range. These days most appraisals are just almost likely following automatic software valuation, automation valuation software has a range and C4 definitely is low to medium.

Nowadays higher bids happen not because of the quality of the house but to get selected from the competition. Now since most appraisal uses list/sold value from 6-12 months ago, that's where the potential gap is. That's why expect to wait for at least 13 months to catch up with the market.

The address is 3717 Memory Ln amarillo, Tx 79109
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
4y
"I assumed they would base the appraisal on market price, not negotiated price." negotiated price IS the market price
if comps have newish stuff at the same level "average" could be accurate.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
4y
Quote from @Todd McFarland:

Quote from @Carlos Ptriawan:

If I know the address, I can guess the appraisal. The C4 is usually at the low 30-40% percentage of the range. These days most appraisals are just almost likely following automatic software valuation, automation valuation software has a range and C4 definitely is low to medium.

Nowadays higher bids happen not because of the quality of the house but to get selected from the competition. Now since most appraisal uses list/sold value from 6-12 months ago, that's where the potential gap is. That's why expect to wait for at least 13 months to catch up with the market.

The address is 3717 Memory Ln amarillo, Tx 79109

C4 is 128-135k

Is that what your appraisal says ?
0 Reply
Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Bill B.:

You always need a certain percent down. If it appraised for $500k they wouldn’t borrow you $400k (80%) if you we’re buying it for $130k. The most you can borrow is a percent of the purchase price or that percent of the appraisal, whichever is LOWER. That percent should be in your loan dox.
The only time the appraisal matters is when it’s lower than the purchase price. Then you need to bring that difference in “cash” in addition to your downpayment.

My lender has a couple of different options.
1. "Purchase and improve": Will cover 100% of purchase and rehab if purchase and rehab comes in at 85% or less of the subject to appraisal. No payments until repairs are complete or up to 12 months. All accrued interest will be paid on the back end at refi. At permanent financing, they will cover up to 85% of the ARV. So technically, if the total all in price is less than 85% of ARV, you can get into the property for $0 out of pocket expense.
2 “As-is”: Will cover up to 85% of the appraisal value and set up the loan as permanent financing.
Example:
Purchase price: $50k
Rehab: $20k
ARV: $100k
Loan total for P&R: $70k
Permanent finance: (85% of ARV) $85k
Money to buyer at refi: $15k
0 Reply
Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Carlos Ptriawan:

Quote from @Todd McFarland:

Quote from @Carlos Ptriawan:

If I know the address, I can guess the appraisal. The C4 is usually at the low 30-40% percentage of the range. These days most appraisals are just almost likely following automatic software valuation, automation valuation software has a range and C4 definitely is low to medium.

Nowadays higher bids happen not because of the quality of the house but to get selected from the competition. Now since most appraisal uses list/sold value from 6-12 months ago, that's where the potential gap is. That's why expect to wait for at least 13 months to catch up with the market.

The address is 3717 Memory Ln amarillo, Tx 79109

C4 is 128-135k

Is that what your appraisal says ?
Appraisal is for $136k. So that lines up, but the issue is that it shouldn’t be classified as C4 according to the definition in the report
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
4y
Quote from @Todd McFarland:

Quote from @Carlos Ptriawan:

Quote from @Todd McFarland:

Quote from @Carlos Ptriawan:

If I know the address, I can guess the appraisal. The C4 is usually at the low 30-40% percentage of the range. These days most appraisals are just almost likely following automatic software valuation, automation valuation software has a range and C4 definitely is low to medium.

Nowadays higher bids happen not because of the quality of the house but to get selected from the competition. Now since most appraisal uses list/sold value from 6-12 months ago, that's where the potential gap is. That's why expect to wait for at least 13 months to catch up with the market.

The address is 3717 Memory Ln amarillo, Tx 79109

C4 is 128-135k

Is that what your appraisal says ?
Appraisal is for $136k. So that lines up, but the issue is that it shouldn’t be classified as C4 according to the definition in the report

That would be difficult. Reason is: this particular block PSF max is $119. With your house size, the max 'normal' valuation is only $143k. This particular block has a neutral rating in terms of appreciation. Even if it's C2 it's still can't go beyond $119 PSF.
1 Reply
Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Carlos Ptriawan:

Quote from @Todd McFarland:

Quote from @Carlos Ptriawan:

Quote from @Todd McFarland:

Quote from @Carlos Ptriawan:

If I know the address, I can guess the appraisal. The C4 is usually at the low 30-40% percentage of the range. These days most appraisals are just almost likely following automatic software valuation, automation valuation software has a range and C4 definitely is low to medium.

Nowadays higher bids happen not because of the quality of the house but to get selected from the competition. Now since most appraisal uses list/sold value from 6-12 months ago, that's where the potential gap is. That's why expect to wait for at least 13 months to catch up with the market.

The address is 3717 Memory Ln amarillo, Tx 79109

C4 is 128-135k

Is that what your appraisal says ?
Appraisal is for $136k. So that lines up, but the issue is that it shouldn’t be classified as C4 according to the definition in the report

That would be difficult. Reason is: this particular block PSF max is $119. With your house size, the max 'normal' valuation is only $143k. This particular block has a neutral rating in terms of appreciation. Even if it's C2 it's still can't go beyond $119 PSF.

I would take that $119 PSF. Where did you find or how did you come up with that information?
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Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Thank you everyone that has contributed to my education today. I have a much better understanding now of the whole appraisal process!
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Jon Martin
Member since 2022 · 1k+ posts · 1k+ votes
4y

No, I got you the first time. If there is an appraisal contingency, both parties are allowed to back out if either party is not willing to go with the appraised value.

Happened with my recent purchase where the appraisal was more than 10% below the agreed upon price because it was tough to find good comps for both the listing agent and the appraiser. There was a bit of a stalemate where the seller was in shock and supposedly wouldn't budge, so I offered to cover ~25% of the gap and they went for it. Seller fatigue is a thing.

Now if there are easily verifiable flaws, you have a chance, but you are still relying on the appraiser to acknowledge their mistake. Otherwise, your only option is to start over with another lender.
0 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
4y
The bank is the client with a purchase appraisal. It's to protect them, you just get to pay for it.

Lender's insurance also protects the bank but you get to pay for that, too.

When you list to sell, your buyer will be represented by an agent that negotiates against you. You'll pay for that privilege as well.

A high purchase appraisal just upsets the seller. Take this and say phew👍
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Aaron Poling
Realtor · WV · Member since 2018 · 454 posts · 310 votes
4y
The appraisal is their opinion of value. I would suggest disputing it, but in a dispute you have to show an error or something that they missed or didn't know to have a chance of winning. You can never just dispute that you disagree with value, as they will never accept that. In some cases they will make changes to the appraisal and it doesn't actually change their opinion of value. Very frustrating I know, but would recommend running a dispute. If it doesn't work you could switch lenders and order a new appraisal (if it is fha the appraisal will stay with the property). Considering the difference isn't great, I would suggest paying the difference if the dispute doesn't help.
Good Luck! Aaron
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Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Jon Martin:

No, I got you the first time. If there is an appraisal contingency, both parties are allowed to back out if either party is not willing to go with the appraised value.

Happened with my recent purchase where the appraisal was more than 10% below the agreed upon price because it was tough to find good comps for both the listing agent and the appraiser. There was a bit of a stalemate where the seller was in shock and supposedly wouldn't budge, so I offered to cover ~25% of the gap and they went for it. Seller fatigue is a thing.

Now if there are easily verifiable flaws, you have a chance, but you are still relying on the appraiser to acknowledge their mistake. Otherwise, your only option is to start over with another lender.
I’ve reached out to the appraiser to discuss his “opinion” and try to persuade him to reevaluate the condition. That’s really the main flaw in the report. We will see what happens, either way I’m claiming it a lesson learned and moving on with the deal. It will have a good positive cash flow.
0 Reply
Todd McFarland
OP
Member since 2022 · 13 posts · 1 vote
4y
Quote from @Aaron Poling:

The appraisal is their opinion of value. I would suggest disputing it, but in a dispute you have to show an error or something that they missed or didn't know to have a chance of winning. You can never just dispute that you disagree with value, as they will never accept that. In some cases they will make changes to the appraisal and it doesn't actually change their opinion of value. Very frustrating I know, but would recommend running a dispute. If it doesn't work you could switch lenders and order a new appraisal (if it is fha the appraisal will stay with the property). Considering the difference isn't great, I would suggest paying the difference if the dispute doesn't help.
Good Luck! Aaron
I’ve reached out to the appraiser to discuss his “opinion” and try to persuade him to reevaluate the condition. That’s really the main flaw in the report. We will see what happens, either way I’m claiming it a lesson learned and moving on with the deal. It will have a good positive cash flow.
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