Appraisals came in WAAAAY too low? Options?
Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes
Appraisals came in WAAAAY too low? Options?
Most Popular Reply
Stetson MillerBusiness Member
Real Estate Broker · Fort Myers, FL · Member since 2019 · 576 posts · 423 votes@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.
Stetson Miller Realtor545 Reviews
42 Replies
- 5yWill GastonPro MemberRental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
The expectation that an appraiser will get a value correctly is not a great assumption in my experience. Moving forward I'd recommend giving the appraiser what I call a "hype packet" before he gets to the property via email. It includes some or all of the following:
-A quick bio about my experience level and the properties that I've owned in/around the neighborhood
-Detailed list of renovations that were done and the licensed contractors that did them
-Before and after pictures that are professionally done
-Highest comps that I can find, including other properties I have or do own
-Other appraisals from similar properties that I own that I think will help the value
-Lease on the property and/or comparable leases if applicable
-A range of what I think the property is worth
After all the bad appraisals I've had earlier in my career I can't imagine having one done in the future and not trying to provide these types of things. In my market, appraisers can come from 30-45 minutes away and some of them literally have no clue what the property is actually worth. It's vital to the BRRRR process and not something to leave to chance. - Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes5y
Originally posted by @Will Gaston:
The expectation that an appraiser will get a value correctly is not a great assumption in my experience. Moving forward I'd recommend giving the appraiser what I call a "hype packet" before he gets to the property via email. It includes some or all of the following:
-A quick bio about my experience level and the properties that I've owned in/around the neighborhood
-Detailed list of renovations that were done and the licensed contractors that did them
-Before and after pictures that are professionally done
-Highest comps that I can find, including other properties I have or do own
-Other appraisals from similar properties that I own that I think will help the value
-Lease on the property and/or comparable leases if applicable
-A range of what I think the property is worth
After all the bad appraisals I've had earlier in my career I can't imagine having one done in the future and not trying to provide these types of things. In my market, appraisers can come from 30-45 minutes away and some of them literally have no clue what the property is actually worth. It's vital to the BRRRR process and not something to leave to chance.Amazing advice, Will. I am definitely learning this the hard way and I will save this info for my next one. Would you be able to comment on the earlier messages where people told me I should be waiting the full 6 months of seasoning? They say that within 6 months, the original low purchase price of these homes is weighing down the comps. It appears that the appraiser only used 3 comps per home, however.
- 5yWill GastonPro MemberRental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
@Jeff Plotkin I'm a bad person to ask about residential seasoning as I only work with commercial/portfolio lenders.
Most of the ones that I deal with don't require a specific seasoning period as long as noticeable improvements have been performed.
- Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes5y
@Will Gaston I probably should have mentioned in my original post that I am using a commercial lender. Thank you!
- Lender · Chicago, IL · Member since 2010 · 149 posts · 127 votes5y
Pulling comps before you take on a project is vitally important. Even so many people do not understand what is actually comparable. Please confirm, square footage, room count and proximity to the property. As a lender, by far the number one reason a loan does not close is the appraisal. This is not to say a lot of deals do not close, but if the borrower is prequalified the appraisal is the only thing that has not been fully confirmed before hand. When a borrower comes in with a contract and the realtor confirms the anticipated ARV we proceed with the loan process.
The last deal that I had where the appraisal was too low the the first thing is to contest the appraisal. The realtor and borrower sent me comps I I reviewed them to submit for appraisal review and each comp they gave me was twice the size of the property they were buying. In that case the appraisal would not be overturned and it would not make sense for the borrower to pay for another appraisal.
Sometimes the appraiser is wrong and we can overturn low appraisals showing superior comps to what the appraiser used. In your scenario, a property next door that is similar in size square footage and design would be a superior comparable. That is if the property sold recently. In addition you need at least 3 good comps to overturn the appraisal.
It may sound like I am saying the appraiser was right. Many times they are, but it is up to us to do our homework in advance to know what the true ARV is. In some rare cases the market values are decreasing as well. When you start a project and you have done a great job in accessing the ARV yet at the time you are looking to refinance the properties you were able to use as comps are now to old or other properties sold that are more comparable that are of lower value.
This was a long answer to the question what should I do. The first step is get comps to know what the value is.
- Paradise, CA · Member since 2015 · 1k+ posts · 871 votes5y
Originally posted by @Jeff Plotkin:
@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.
if you paid for them, you are entitled to the report by law. If you didn't pay, you may still be entitled if they were used in decisioning your loan. I would google up on CFPB and appraisals on consumer real estate (Assuming these are not commercial loans). If these are commercial loans, you are less protected.
Calling the appraiser is a waste of time. Someone on this forum suggested you appeal to the appraiser to change his number. That's exactly why AMC's exist, so you cannot appeal to an appraiser and coerce or influence them. The lender is the contact, not you. You shouldn't even be allowed to talk to the appraiser however, you should be allowed to challenge it, again, assuming you paid for it and again, quite probably even if you didn't pay for it.
- 5ySarah BlessePro MemberProperty Manager · Fresno, CA · Member since 2017 · 35 posts · 23 votes
@Jeff Plotkin
This happened to me. Challenge the appraisal and submit a list of improvements. I got my lender to write the letter to the appraiser and submit the list of improvements. Include the comps you want them to look at. Also, find a way to discredit the appraisal. It could be that the comps they looked at aren’t within a mile, etc. my appraiser didn’t calculate my sq footage correctly.
- Inspector · Voorhees, NJ · Member since 2015 · 104 posts · 47 votes5y
@Jeff Plotkin there are many ways an appraiser arrives at their opinion of value. They will look at the income approach for rental properties, which takes into consideration NOI and cap rate, cost approach and most commonly, sales comparison. The one issue I see most often when appraisals come back low for an investors cash out refinance is that they didn't consider the median home value. Sometimes a proeprty owner will select the highest sales comp with the closest age, size, room count, bed, baths, etc...buy they will not look at the number of homes sold and the median value of them. For example...maybe the house next door sold for $165k...but it was the only one in the immediate market that sold for that amount BUT let's say there were 5 other homes sold that were similar for $125k. The median and mode is the better variable when looking at an appraiser. Also remember an appraiser assigns an opinion of value that is supposed to be impartial and unbiased. So, in theory, the owner always wants the value to be higher....because a higher value is in your interest. And the bank always wants the value to be lower...because it reduces the banks risk exposure. The appraisers job is to evaluate ALL variables and determine their opinion of value that satisfies BOTH parties. I suggest that you go back and have an agent run a market comparison report and look at the Median and Mode of your immediate market. If the numbers still come back wrong, you can do an appeal by going to another appraiser...but you are going to pay a new assignment fee. Let me know how you make out!
- 5yUpen PatelPro MemberLender · Nationwide Lender · Member since 2015 · 1k+ posts · 814 votes
Originally posted by @Jeff Plotkin:
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?
This is an issue with an incompetent appraiser. Has nothing to do with an appraisal being done before 6 month seasoning. An appraisal is done the same way, irrespective of the seasoning.
Have the lender appeal the appraisal and provide a detailed bullet list along with comps. If the appraiser doesn't agree to make chances, then ask the lender to do a 2nd appraisal.
Appraisal is a human process, so it is likely to have a variance in value, but it still does follow a certain set of guidelines.
Hope this helps.
- Investor · Sacramento, CA · Member since 2020 · 33 posts · 19 votes5y
@Jeff Plotkin
I would get another appraisal. When I was doing a refi on my residential property one bank came in with 395k. I went with a different bank who gave came-back with 520k appraisal.
- Investor · Rochester, MI · Member since 2017 · 1k+ posts · 584 votes5y
In BRRRRs seasoning might affect your outcome, but you need to come fully loaded (reports) and have them in hand and meet the appraisal guy or girl. What I do since I am a real estate agent is I get 3+ comps depending on how hot the area is sometimes there is more. I set my parameters +/- 100sqft of my property, I only search for SOLD comps not pending, and last I search only 180 days past not 365 also in very hot markets I will do the same search but in past 90 days.
So for example if you purchased your BRRRR at the time comps were $120 and now they are at $130, you can show the increase to the appraiser with the 180 day to 90 day that the market is going up by 5,10,15%, etc....
I also include a self made report that shows line per line per comp. They way it looks is for example the 1st comp would show poorly broken cracked driveway, I would high light that in RED and then in my property overview I would put in GREEN new driveway. another example is heating and cooling would put in RED the date of the systems ie:2008 12 years old and then put my report in GREEN 2020 new. Formica countertops RED, Granite tops GREEN.
This report is clearly easy to red and shows all the upgrades your property has versus the comped property and should clearly hold its value if not the same but higher.
WORST CASE, but this only applies to people that are RE agents or if you have a good fiend willing to do this for you, list your properties for sale do not mention its tenant occupied this will bring only investors, but list it as you were going to sell to a primary home owner, in this process I get clear evidence that my property is worth what I comped it for. Then I start getting offers in at the price I want it comped or even higher. I did this once and called the appraiser roughly 3 weeks later and it was like a bombshell, he again said you bought it for so low I told him so your punishing me for a deal that I found and no one else?
Also I would not put prices on the rehab you put into it, all that does is gives the appraiser a nice and easy math problem.....add it all up and that's your ARV. I did that once before and I called the appraiser acting confused stating the numbers I gave you were off from a different property and that I have the updated numbers, jacked all the numbers up and he didn't even ask for receipts but I wouldn't go into this route because he might just ask for them.
- Real Estate Agent · Winston Salem, NC · Member since 2014 · 486 posts · 303 votes5y
@Jeff Plotkin did you tell the appraiser all of the updates you completed?
- 5yWhitney HuttenPro MemberInvestor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
@Jeff Plotkin He didn't give you the report? Did you ask for it? There could be other appraisal errors in there. I've seen it all! I had one come back where the appraiser counted the wrong number of bedrooms and square footage and used all photos from the previous listing indicating they had never been in the home. Even with that, I was unable to get the appraisal changed, BUT I was able to substantiate a claim against the state board and his license and get my money back. Switch lenders!
- Rental Property Investor · New York City, NY · Member since 2018 · 41 posts · 11 votes5y
Originally posted by @Whitney Hutten:
@Jeff Plotkin He didn't give you the report? Did you ask for it? There could be other appraisal errors in there. I've seen it all! I had one come back where the appraiser counted the wrong number of bedrooms and square footage and used all photos from the previous listing indicating they had never been in the home. Even with that, I was unable to get the appraisal changed, BUT I was able to substantiate a claim against the state board and his license and get my money back. Switch lenders!
I posted an update yesterday but it looks like it did not go through. Yes, I found tons of errors! For one home, he was using comps with the wrong number of bedrooms and all of those homes were significantly outdated compared to my home which was completely renovated. For the other home, it was even worse. All of the comps were over 1 year old, over 1-2 miles away, and one comp was even a mobile home (mine is not). I found new and better comps, listed reasons for why each of their comps should be disputed, provided additional info on the rehabs and the contractor payments and sent everything back to the lender. The lender sent it off to the investor who came back saying that what I provided was really high quality and the appraisal will be adjusted accordingly!
- 5yDustin MorrisPro MemberRental Property Investor · Salem, VA · Member since 2017 · 113 posts · 39 votes
@Jeff Plotkin honestly this is the hardest part of the whole process. It makes it very difficult to dispute the appraisal if you aren’t able to see exactly how the report was completed. Of course the sales comp method is one way appraisals are conducted but the rental income method can be another way appraisers look at things. In the future be sure the appraiser understands that the property was purchased as a distressed sale. You did put a lot of work into it but they need to understand with the amount of money spent there were major renovations done. Typically with our lender we have the appraisers contact to set up the walk through together. It allows us to coordinate being at the property and have the opportunity to tell the appraiser everything that is done.
Having a conversation with the appraiser once you've had a chance to review the report can help you get insight for the future if you are going to continue to work with this bank. Sad part is if you get a different appraiser the next time things could be totally different unfortunately or fortunately. When you are picking comps to dispute be sure that it's more recent, same beds/baths, closer to the property, to make sure these comps will be hard to shoot holes in. The fact that many are a year plus could help you. Good luck this is one of the most challenging things with the BRRRR but sometimes you get unlucky and other times you get real lucky. The more of these you do the more you'll hopefully see this
- 5yWhitney HuttenPro MemberInvestor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
@Jeff Plotkin Agreed. The refi is the most tenuous part of the process. Keep on the appraisal. If they change it to your satisfaction, great! If not, make sure to take the steps to file it with your state board, against the appraiser's license (if everything you say is true), and with your credit card company to get your money back. Then switch lenders and request that this appraiser NOT appraise the home. While you can't say who will appraise the home, you can name an appraiser to not appraise your home based on their previous incompetence (not just because you don't like them).
Join the conversationCreate a free account to reply, vote on answers and follow this thread.