Appraisals came in WAAAAY too low? Options?

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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Appraisals came in WAAAAY too low? Options?

Jeff Plotkin
Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes

I went for my first two BRRRR deals at the same time this summer and everything went great. I got tenants in both properties and they turned out beautifully. Both homes were purchased and rehabbed with cash. Today, I got the appraisals back for both properties (doing both BRRRRs as two separate loans from the same lender) and they came back insanely low. The house next door to one of them sold for $165k but mine appraised for $123k, and the other house was even lower.

What should I do? Can I ask for a second appraisal? Should I try waiting a few months and go with a different lender? I can't accept these loan terms at these appraised values. 

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Stetson MillerBusiness Member
Real Estate Broker · Fort Myers, FL · Member since 2019 · 576 posts · 423 votes
5y

@Jeff Plotkin The best part about real estate investing is that there's often a creative answer to every issue. You don't necessarily have to go completely with either of those options, it may end up working better for you to do a combination of both. I know you said you had an expected appraisal amount, but have you tried to compare your returns at that price, to your returns at an appraisal price somewhere in the middle?

It's very rare that you're going to come out victorious fighting a lender, they're not interested in negotiations, but it's slightly less rare to be able to meet them in the middle. They're going to have to trust the appraiser, as this is the only other party on their side that that has no interest in the loan proceedings. This is the reasoning behind appraisers being paid flat fees, rather than being commission based. I would suggest looking into how far the bank is willing to go in questioning the appraisal. If they're not willing to budge, your best bet is waiting the full 6 months, and potentially trying again with a different bank.

The good thing about the BRRRR strategy is that, at this point, you've gotten past the difficult part. In the absolute worst case scenario, assuming you don't end up pulling any money out of these properties, you have two rentals that you're gaining income from. Obviously this isn't close to ideal, but it's not a bad way to end up on the other side of this either.

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Jeff Plotkin:

    I went for my first two BRRRR deals at the same time this summer and everything went great. I got tenants in both properties and they turned out beautifully. Both homes were purchased and rehabbed with cash. Today, I got the appraisals back for both properties (doing both BRRRRs as two separate loans from the same lender) and they came back insanely low. The house next door to one of them sold for $165k but mine appraised for $123k, and the other house was even lower.

    What should I do? Can I ask for a second appraisal? Should I try waiting a few months and go with a different lender? I can't accept these loan terms at these appraised values. 

     What did you purchase each for, what did you invest into each for rehab and what did they appraise for? Sometimes the appraiser is looking at your purchase price and holding down your appraisal as a result. If you can demonstrate the value of improvements since purchasing, it can help justify higher appraisal.

    As far as the property next door, was it close to identical? How long ago did the neighboring house sell? Looking at the comps they came up with to justify the appraisal price, are they good comparisons?

    2Reply
  • Jeff Plotkin
    OP
    Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
    5y

    @Joe Splitrock Thank you for the response. I purchased one for $80k + $32k rehab and the other for $87k +$40k rehab. I expected both to appraise for $160k each or higher. I only provided the appraiser before and after photos, so you're right I should see if I can include the scope of work for each property. Yes, the house next door is close to identical and it sold in August of this year. I am actually still waiting on the appraisal reports so I cannot see what they used as comps.

    I am more wondering what options are available as I've never been in this situation. Is it possible to challenge the appraisal? I've spoken to agents in the area today and they agree these values are too low.

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Jeff Plotkin:

    I went for my first two BRRRR deals at the same time this summer

    Define 'this summer'.  If you purchased less than 6 months ago, your PP is in the comp.

    Captioning a picture of someone shooting themselves in the foot in the BRRR dictionary is what you wrote.

    Its not emphasized enough on here the importance of proper and full seasoning of at least 6 months.  

    7Reply
  • Jeff Plotkin
    OP
    Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
    5y

    @Steve Vaughan Not really sure what seasoning has to do with it. I found a lender with no seasoning requirements, and the issue I have is with the appraisal which to me seems independent of seasoning. I bought both of them in early July.

    0Reply
  • Jeremy Isaac
    Member since 2020 · 18 posts · 17 votes
    5y

    Yeah, I don't think the loan officer would have taken the applications if seasoning was an issue. I'd ask your loan officer what the chances are of sending a different appraiser out on their dime and if they refuse, I'd cancel the applications and try a couple other lenders.

    2Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Jeff Plotkin:

    @Steve Vaughan Not really sure what seasoning has to do with it. I found a lender with no seasoning requirements, and the issue I have is with the appraisal which to me seems independent of seasoning. I bought both of them in early July.

    If not enough time has past since your purchase in the 80s, it is this appraisals best comp is why.  Let more time pass or deal with this kind of crud. Your choice. 

    1Reply
  • Stetson MillerBusiness Member
    Real Estate Broker · Fort Myers, FL · Member since 2019 · 576 posts · 423 votes
    5y

    @Jeff Plotkin I may just have read your comment wrong, but am I correct in saying that the appraiser was never physically in the property to issue the appraisal report?

    @Steve Vaughan is absolutely correct in pointing out the likely culprit for the low appraisals. Your best bet is to wait for the actual report, as this will include highly detailed reasoning for those prices. From there, you'll be able to submit appeals for each of the reasons listed that you disagree with, to your mortgage broker.

    All of these things should be done first, prior to attempting to have a second appraisal done, as that's more like grasping at straws. It's highly likely that you'll be paying for the second appraisal, and on top of that, even though it will be independent of the first, they're going to consider the primary appraisal heavily in determining their own appraisal amounts. 

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  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    @Steve Vaughan's explanation is almost certainly the correct one.  Trying to turn the property in too short a time period (seasoning is a perfectly good word for the phenomenon but call it whatever you like) often yields this precise result because the appraiser cannot in fairness ignore your initial purchase.  Notice that the $123K appraisal essentially mirrored your purchase price + repairs.      

    4Reply
  • Jeff Plotkin
    OP
    Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
    5y

    @Stetson Miller No one ever talks about that, everyone always talks about a way to speed up the process and recycle your money faster! If this is the case, would you suggest that I get another appraisal after 6 months (January) or just fight it the best I can and take what I can get?

    0Reply
  • Stetson MillerBusiness Member
    Real Estate Broker · Fort Myers, FL · Member since 2019 · 576 posts · 423 votes
    5y

    @Jeff Plotkin The best part about real estate investing is that there's often a creative answer to every issue. You don't necessarily have to go completely with either of those options, it may end up working better for you to do a combination of both. I know you said you had an expected appraisal amount, but have you tried to compare your returns at that price, to your returns at an appraisal price somewhere in the middle?

    It's very rare that you're going to come out victorious fighting a lender, they're not interested in negotiations, but it's slightly less rare to be able to meet them in the middle. They're going to have to trust the appraiser, as this is the only other party on their side that that has no interest in the loan proceedings. This is the reasoning behind appraisers being paid flat fees, rather than being commission based. I would suggest looking into how far the bank is willing to go in questioning the appraisal. If they're not willing to budge, your best bet is waiting the full 6 months, and potentially trying again with a different bank.

    The good thing about the BRRRR strategy is that, at this point, you've gotten past the difficult part. In the absolute worst case scenario, assuming you don't end up pulling any money out of these properties, you have two rentals that you're gaining income from. Obviously this isn't close to ideal, but it's not a bad way to end up on the other side of this either.

    [email protected]850-259-2910
    Stetson Miller Realtor545 Reviews
    View Page
    8Reply
  • Jeff Plotkin
    OP
    Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
    5y

    Appreciate the advice everyone, thanks!

    0Reply
  • Cindy Bacigalupo
    Flipper/Rehabber · Aliso Viejo, CA · Member since 2020 · 29 posts · 32 votes
    5y

    @Jeff Plotkin

    I would start with a new lender now

    0Reply
  • Kent Clawson
    Member since 2019 · 21 posts · 13 votes
    5y

    @Jeff Plotkin Ask the appraiser as well. If there was information they didn’t (or shouldn’t) consider they can update. Especially where you purchased cash, a lot of times they exclude those because they are not true apples to apples (Boise is seeing these exclusions on the other side because house prices are so blown up with Californicated money flowing in that if a bank had to sell the place a year from now that they would never be able to get purchasers who need bank funding). In the end the appraiser is covering the lenders interest and generally is less interest in yours. Ultimately the appraiser needs to give the the bank an idea of what they are going to get for your place if you flake out and stop paying them. The fortunate thing in all of this, they really are neutral (they get paid whether the loan funds or not :-)

    Ideally I would start it off as legitimate learning effort and ask them what factors are influencing, because you really thought that it was most comparable to the house next door. For style points, if you are not a jerk, people often like to talk about what they do and how they do it. Worst case if there are areas that you are off, then you will know (and be ready for the next one ;-)

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    5y

    The number 1 issue with refi appraisals is the appraiser does not have a purchase and sale contract to guide them like they do with a regular purchase appraisal. This is one of the factors that leads to these all over the place appraisals on refinances. Next time for sure you want to provide the appraiser with the complete scope of work for the upgrades you did and how much money they cost you to complete. 

    1Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    5y

    @Jeff Plotkin all do respect this mistake is on you. You really need to know your numbers,( unless the appraiser is clueless as your property sounds like it has newer items ) ,,, Now you have no choice but to hold them for rental income and prey they go up in value.

    Good Luck 

    0Reply
  • Kendall Staggs
    Investor · Huntington, Barboursville · Member since 2019 · 42 posts · 29 votes
    5y

    @Jeff Plotkin your bank will not do anything to help you with the appraisal. However, I have challenge the appraiser on 2 of my sales in the past. You must contact the appraiser over the phone or in person and ask "sir/mam would you be willing to modify your appraisal report if I were to suggest some better comps and some areas where the initial report was a little off on the grade of materials used in my rehab?" You have to understand, the appraiser has no requirement and very little incentive to modify their report. The appraiser has also already been paid, so this will just be unpaid additional work. So, you have to build a repour and be extremely nice.  

    If the appraiser says yes, take the report, pick every aspect of the report where the appraiser was incorrect and find 3 comps which are better than the comps used. Your real estate agent should be able to help with finding comps. Next, find 3 aspects of their appraisal report which were correct and exactly on point. Then, send an email to the appraiser and the loan officer asking for the modification. Be sure to start with the 3 aspects of the report which were correct and spot on, then start in with a short and concise list of the areas of the report which you request be reassessed and the 3 "better" comps which you would like to have taken into consideration. Be sure to avoid negative language and never require or demand they change anything. Always use wording like "please consider", "I request" and "reassess". 

    If this does not work, you will likely have to have another appraisal and maybe even have to change banks all together. 

    2Reply
  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Jeff Plotkin there are a few different reasons why these numbers could have come in low (here's a guide to help):

    1. Seasoning periods - many appraisers that deal with rehabs know how to account for this and work around that previous value of the house.  But there are still many who don't.

    2. Numbers were incorrect - The market trends aren't there to support the ARV, or the construction isn't on par with the quality of the other homes.

    3. Bad appraiser - Like any fields, there are appraisers who just don't what they are doing.  Perhaps they are in a neighborhood they are unfamiliar with, an asset class they don't know how to comp, or they just "run numbers" and don't actually take a look at the quality of the home.  We did a refi this summer and the bank wanted to do a desk appraisal... we pushed and waited for an in-person one.

    What sucks is when you have multiple of these factors hit at once. Personally, I'd switch lenders ASAP.

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    "What should I do? Can I ask for a second appraisal? Should I try waiting a few months and go with a different lender? I can't accept these loan terms at these appraised values."

    1) Lender hires the appraiser.  You think you have a good case, go to the lender and explain why.

    2) If not, then you'll prob need a new lender and new appraisal.

    3) If second appraisal comes in low, may be time to re-assess.  Ton of NYC are getting prop tax appeals ready and you may be on the wrong side.

    1Reply
  • Jeff Plotkin
    OP
    Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
    5y

    @Whitney Hutten I appreciate the constructive advice, thanks! My lender will not give me the appraisal report but he gave me the comps the appraiser used and they don’t make sense. I’ve provided the lender with a lot more information about the rehab and the corresponding invoices and will be provided comps I think make more sense today.

    0Reply
  • Jeff Plotkin
    OP
    Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
    5y

    @Kendall Staggs I’m wondering if it’s the state I’m investing in, but I’m unable work directly with the appraiser and need to go through my lender. The lender will not even provide the appraisal reports because they’re afraid I’ll shop around once I have them. They only provided me the comps the appraiser used (which I believe are unfair comparisons)

    0Reply
  • Jeff Piscioniere
    Investor · Shelton, CT · Member since 2016 · 218 posts · 225 votes
    5y

    @Jeff Plotkin is it normal you’re not being provided the appraisal report??? You paid for it after all. Would be interested to hear if that is standard practice. Good luck man!

    1Reply
  • Joe Edwards
    Investor · Northern New Jersey · Member since 2020 · 94 posts · 96 votes
    5y

    @Jeff Plotkin

    Did you pay for the appraisal or did your lender? I find it odd that your lender doesnt provide you the full report.

    I personally would not work with that lender. Data is everything in realestate and you can get a ton of data from your appraisal report that will further help you understand the market your investing in.

    In regards to the BRRRR portions of your deal here in NJ I typically wait 9-12 months minimum from purchase to refi so that I dont have any appraisal. But build that cost in the structure of the deal when putting it together.

    Wish you you the best you may have to be a little more patient on these 2

    1Reply
  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes
    5y

    Feeding the appraiser with information (ideally before hand) primes them to reach a similar conclusion. I typically provide comps, outline renovation budget in detail while talking about improvements with pride and provide a cap rate analysis to show how the desired ARV is beyond reasonable.

    Basically, I am setting up the scene to make any other figure feel unreasonable or simply not as robust.

    Happy to discuss further and help you prepare materials for your next refi.

    2Reply
  • Reece Iovine
    Realtor · Columbus, OH · Member since 2016 · 170 posts · 227 votes
    5y

    Switch lenders...did you pull comps for the appraiser what was their justification for the value they arose at.

    0Reply
  • Jeff Plotkin
    OP
    Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
    5y

    I just took a much deeper dive into the comps the appraiser used and they are not representative at all. For one of the homes, all 3 comps they used were over 1 year old, and one of them is a mobile home (which the subject property is not). For the other home, I upgraded it from a 3 bed/2 bath to a 4/2, but the comps they used were all 3/2s and out of date homes. Both of these homes were updated head to toe and the comps did not have anything new. I provided 3 new comps for each home to my lender who should be communicating them to the appraiser. 

    To those who say not waiting the 6 months of seasoning weighs down the comps, how is this true when the appraiser is only using 3 comps per home? 

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