Help! Appraisal came in MUCH lower than ARV estimate...

4 Reply

Omar Ramirez

Lender · Springfield, MO · Member since 2023 · 6 posts · 14 votes

I'm sorry to hear about this. However, this issue is quite happens from time to time among my clients. The good news is that there's a way to improve those numbers. Most appraisal companies allow for disputes. You should inform your lender that you want to dispute the "as-is" value listed on the appraisal. Keep in mind that you only have one chance to dispute that report, so it's important to research the report thoroughly and identify the areas that need to be disputed. When I review the reports with my borrowers, we usually find one or two things that need correcting.

Condition- If you've recently completed a full rehab on your property, you'll want to aim for a C2 condition rating on the report. This rating means that your property is "like-new" and has been fully rehabbed, and it's the best rating you can get for properties that have been rehabbed.If the report lists a C3 or below, don't worry! You can dispute these conditions and support your claim by providing comparables with C2 conditions. Don't hesitate to reach out if you have any questions or need further assistance.

Property Comparables- It's really important to keep in mind that if your property has 4 bedrooms and 2 bathrooms, but the comparable properties listed on the reports show 3 bedrooms and 1 bathroom, those comparables might not be accurate and could potentially impact the value of your property. Just something to keep in mind!

When you're looking at the reports and you feel like there's something that needs to be disputed, it's important to send over comparable properties that have similar conditions and size configurations. Just a heads up, though - if you're trying to compare a rehab property, don't use newly built properties as comps because they won't be approved.

When you're trying to compare properties, you want to find ones that are similar in size, have the same number of bedrooms and bathrooms, and were sold within the last six months. The best way to do this is to look for comparable properties within a one-mile radius of your subject property. Remember, the closer they are, the better your comps will be!

7 Reply

Jay HurstBusiness Member

Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes

Quote from @Alyssa Balam:

We're ran into our first BIG hiccup in real estate....

We purchased a large SFH in the area for $185K and took a loan out for $235K (to use as construction loan for the reno) with seemingly lots of update potential to turn into a triplex. The renovation is complete and it's 3 units now, but due to it being so close to the holidays, we haven't found any tenants yet.

Used hard money to purchase the property and now it's *time's up* and we need to refinance! Unfortunately, the appraisal just came back for $235K when we had estimated along with our real estate agent an ARV closer to $340K based on comps. This is a crushing difference.

Does anyone with more experience have any advice on how to best mitigate a HUGE loss here? We're already asking for another appraisal, but do not have high hopes. The refinance is now set to require $80K cash to close.

Thanks in advance BP community!!

Did you hard money lender not require a "subject to" appraisal done before closing the loan?

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Robin SimonBusiness Member

Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes

Quote from @Alyssa Balam:

We're ran into our first BIG hiccup in real estate....

We purchased a large SFH in the area for $185K and took a loan out for $235K (to use as construction loan for the reno) with seemingly lots of update potential to turn into a triplex. The renovation is complete and it's 3 units now, but due to it being so close to the holidays, we haven't found any tenants yet.

Used hard money to purchase the property and now it's *time's up* and we need to refinance! Unfortunately, the appraisal just came back for $235K when we had estimated along with our real estate agent an ARV closer to $340K based on comps. This is a crushing difference.

Does anyone with more experience have any advice on how to best mitigate a HUGE loss here? We're already asking for another appraisal, but do not have high hopes. The refinance is now set to require $80K cash to close.

Thanks in advance BP community!!

Tough situation - but you should be able to rent out these units asap or thats a huge red flag - if planning on keeping (BRRRR) then holidays or not, should be able to lease it up at market quickly. Triplexes are still going to be valued primarily through sales comps approach but not completely like a SFR - best chance at a better valuation is likely if you can get these three units up and running and leased up

[email protected]

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Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

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We've had some bad appraisals. Sometimes we've been able to argue with the appraiser and get it changed. Once it was a really big mistake and the bank waved them. I think banks will get a second appraisal and split the difference (which is probably not a good idea here.) Other than that, we've dropped the whole thing with that bank and went to another bank and got a new appraisal. This has worked well for us on a few occasions and probably what you should consider doing.

John O'LearyPro Member

Lender · Winter Park, FL · Member since 2021 · 738 posts · 412 votes

[email protected]800-663-4122

I would thoroughly review the comps to make sure they are also multi unit comps. If refinancing into long term debt the lender should require a full appraisal in which the appraiser actually walks the property. Believe it or not, Iv'e seen appraisers comp multi-unit properties with SFR because the subject property was not correctly zoned for 2-4 units, and not properly permitted to me a multi-family house. As @Omar Ramirez mentioned, you can dispute the appraisal. Pull your comps, and make sure they are recently sold and as close to the subject property as possible. Then outline why you think your comps are better than those used in the report. Realtors tend to take every sold property in the area and just average prices out which is not the same approach for an appraiser.

2 Reply

Bob S.

Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes

Quote from @Alyssa Balam:

We're ran into our first BIG hiccup in real estate....

We purchased a large SFH in the area for $185K and took a loan out for $235K (to use as construction loan for the reno) with seemingly lots of update potential to turn into a triplex. The renovation is complete and it's 3 units now, but due to it being so close to the holidays, we haven't found any tenants yet.

Used hard money to purchase the property and now it's *time's up* and we need to refinance! Unfortunately, the appraisal just came back for $235K when we had estimated along with our real estate agent an ARV closer to $340K based on comps. This is a crushing difference.

Does anyone with more experience have any advice on how to best mitigate a HUGE loss here? We're already asking for another appraisal, but do not have high hopes. The refinance is now set to require $80K cash to close.

Thanks in advance BP community!!

Cant find a tenant as its close to the holidays NEVER heard of such a thing. Also, sorry but I am going to " beat you up a bit" This is all on you. How do you not know your numbers? NOTHING you can do but rent it (put in GOVT tenants, you will get more money and secured) and take the loss. Lesson learned.

I have posted 100x, NEVER do a deal unless you know your numbers. You should have shown it to an investor doing deals, REALTOR IS NOT part of your team, they care about. one thing, the sale,

Suck it up, learn and move on. Ok I was not that hard on you :)

Nicholas L.Pro Member

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

@Alyssa Balam

i have found appraisals for small multis to be very unpredictable but i am sorry this is happening

can you pay to extend the loan? have you talked to one or more agents to see what you could sell for?

if it's not renting and you want to rent it, lower the price.

Erik EstradaBusiness Member

Lender · Member since 2022 · 6k+ posts · 1k+ votes

[email protected]818-269-7983

Quote from @Alyssa Balam:

We're ran into our first BIG hiccup in real estate....

We purchased a large SFH in the area for $185K and took a loan out for $235K (to use as construction loan for the reno) with seemingly lots of update potential to turn into a triplex. The renovation is complete and it's 3 units now, but due to it being so close to the holidays, we haven't found any tenants yet.

Used hard money to purchase the property and now it's *time's up* and we need to refinance! Unfortunately, the appraisal just came back for $235K when we had estimated along with our real estate agent an ARV closer to $340K based on comps. This is a crushing difference.

Does anyone with more experience have any advice on how to best mitigate a HUGE loss here? We're already asking for another appraisal, but do not have high hopes. The refinance is now set to require $80K cash to close.

Thanks in advance BP community!!

Hey Alyssa,

That difference in value is huge. How long back are you looking to pull up your comps? Most appraisers use 6 months to 1 year of sales. And will pull them from a mile radius, (If the property is unique or outdated, they may use comps from more than a mile away).

I will say though that some appraisers are more conservative or less experienced than others. I have had a situation where a client had 3 different appraisal reports with $50k-$100k in value difference, all completed within 2 months.

If you feel you will earn a significant return keeping it as a long term rental, you might want to consider ordering a new appraisal and moving forward with a different lender. Be careful doing this though, because many lenders have their own valuations team to double check the accuracy of the report. If there is anything fishy, they will require a new report or can cut the value.

Getting an extension from your hard money lender could also help out. Be advised that many lenders will charge points and/or require higher interest payments if you decide to extend. The cost might be minimal compared to coming in with $80k.... though. Hopefully they can give you enough time to sell the property or look for another bridge loan.

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Brad S.

Investor · Pasadena, CA · Member since 2017 · 613 posts · 523 votes

You have some good replies above, and really, there is little that can be added without knowing more specifics. Like, what were you and your agent basing the arv on? When was that? How long ago did those comps sell? Basically, WHY do you think your property is worth $340k now? ..I mean what are the verifiable "facts/data" that your opinion is based on?

Here are some things to look at in the appraisal to see if it seems reasonable.
* verify the comps are similar triplexes. This brings up some questions. Is your property zoned for 3 units, is it a legal 3 unit, is it legal non-conforming, is it an sfr + adu's or? All that might matter. If your property is a triplex, I would typically only rely heavily on similar triplex sales. If it is an sfr + adu's, that complicates things and I would try and find something similar or evidence for the market's reaction to something similar.
*Are the comps in similar condition/quality, year built, gla size/ lot size, etc to your property? If not, were those differences reasonably taken into account?
* Do the comps have similar configuration (i.e. 3 detached bungalows vs a 3 unit building)
* Are the comps in the same or similar neighborhood/market area?
* Are the comps relatively recent sales? If not, did they explain why they used them and did they analyze any market trend differences between when they sold and the appraisal effective date?

Please add more facts, if you'd like help.

Carlos Ramirez

Investor · Santa Barbara · Member since 2022 · 30 posts · 12 votes

I'm sorry to hear you're facing this situation with your real estate investment.

suggestions on how to potentially mitigate loss:

-See if the lender is willing to extend the hard money loan to give you more time to find tenants and potentially get the property reappraised later when the rental market may be stronger. This would avoid having to refinance right now.
-Negotiate with the lender for a lower refinance amount based on the appraisal. See if they will agree to a loan-to-value ratio of 80% of the $235K appraisal, rather than requiring the full $80K cash to close.
-Consider bringing in an investor partner to provide some of the cash needed to close the refinance loan. Offer them an equity share in exchange.
If there are aspects of the property you could improve for relatively little money, do so and then request another appraisal. Even minor fixes or staging could potentially bump the value.
-As a last resort, you may need to sell the property, even at a loss, to avoid foreclosure if refinancing is not possible. This may be better than taking a larger loss down the road.

The key is likely buying more time and negotiating with the lender. Don't give up hope yet - bringing in an experienced real estate attorney may also help represent your interests in discussions with the lender. Wishing you the best in navigating this challenge.

Dave VonaPro Member

Real Estate Investor · Centennial, CO · Member since 2015 · 106 posts · 38 votes

I know how disappointing that can be, I recently had a SFH appraisal come in low after the rehab.

One of the comps used by the appraiser was my property that I purchased 4 months earlier. However, the comp was not adjusted to account for the minor rehab that I performed. I worked with the bank and they sent the appraiser an itemized list of the work that was done.

In the end, this increased my appraisal by $10K, or roughly 5%. It was still ~$20K below what I had hoped for, but I had to accept it and complete the refinance.

You may want to provide the appraiser your SOW, if you haven't already. Also, review the appraisers comps to see if they are accurate. If there are comps that were missed, then sending those to the appraiser could help your case.