I’ve addressed this topic several times in the forums, and much of this post is taken from an old forum post I wrote, but this subject is important enough to rehabbers and other investors that I wanted to make sure it was captured here on the blog…
One of the biggest areas where rehabbers and other investors are getting beaten up these days is in their property appraisals. They buy right, do a great renovation, find buyers happy to pay their asking price, and then find that the property doesn’t appraise high enough to make the sale! Obviously, you’d like your property’s value to stand on its own without any help from you, but in this market, anything extra you can do to ensure your property hits its target appraisal price is important.
So, below I will present some of the techniques I have used on all of my rehabs to help ensure that the appraisal doesn’t sink the whole deal…
First, it’s important to remember that appraisals are just as much an art as a science. Oftentimes, there is a lot of information that the appraiser is not privy to — such as what the interior of a comp looks like, the circumstances surrounding the sale of a comp, the circumstances surrounding the motivation of the seller of other comps, etc — so, while two appraisers may be equally experienced and skilled, they ultimately may select different comps, make different adjustments and come to different values of your property.
While it’s tremendously important to ensure that your rehab is top-quality in all respects (visually, functionally, price-to-value, etc), the key to ensuring consistently successful appraisals is to focus on your interaction with the appraiser himself. Because the appraiser does have leeway in making decisions on comps and adjustments, his attitude while preparing the appraisal — towards you and the property — may very well impact the result.
Specifically, when dealing with the appraiser, you should strive to do three things:
- Provide Information
- Build Rapport
- Build Trust
By doing these three things, you can go a long way towards getting appraisers to err on the side of trying to help your appraisals come in at your target price. Let’s look at each of these in more detail…
1. From a Providing Information standpoint, remember that appraisers have a tough job these days. They need to make a lot of people (on different sides of the table) happy. Helping them do their job effectively and efficiently will make their lives easier (especially when the underwriter comes back and asks for more details to substantiate the number), and in return, make your life easier. And given new HVCC rules, you may be more familiar with comps in a given area then they are, so you may actually have better comps than the appraiser!
2. From a Building Rapport standpoint, if someone knows you and likes you, they are going to want to help you. Ask the appraiser about his family, ask about his business, ask him questions that allow him to feel like you appreciate his “help”, and (if it’s true) insinuate that you may want to use his services in the future. We don’t like to let our friends down, so the goal is to get the appraiser to feel as if you’re a friend in the short time you’re together
3. From a Building Trust standpoint, many appraisers (and others) are leery of rehabbers these days because a few of them give the rest of us a bad name (shoddy work, lie about repairs, etc). Oftentimes, when appraisers walk into a rehabbed property, they assume that the value is LOWER than an equivalent house that isn’t being flipped. By proving to the appraiser that you’re in the group of rehabbers who take pride in their work and do things the right way, you’ll get the him to appreciate your work and efforts and to trust that your house is probably MORE valuable than an equivalent house that isn’t being flipped.
With that background, here are my concrete suggestions on how to work with appraisers:
- Always ensure that you know when the appraiser is coming to your property. We make sure that our properties are on an agent lockbox and are alarmed. We then tell the lender/broker that the appraiser needs to call us to get access to the property. Nine out of 10 times we’ll get a call the day before the appraisal, but occasionally the appraiser will call while standing outside the house when he sees the “Alarm” sign on the door; when that happens, we tell him how to disable the alarm, but now that we know he’s at the property, we can rush right over or send our project manager over to meet him.
- Always make sure you are present when the appraiser is doing his walk-through. This is your opportunity to build rapport, provide information about what work you did, brag about the fact that you pulled all required permits and only used licensed contractors, and to generally take credit for the great rehab your team has done.
- At the end of the walk-through, you have an opportunity to provide information to the appraiser that he can take back to the office and review. This is the information that will help him do his appraisal and help him justify the number he comes up with in case anyone asks. Here are the things I provide (nicely organized in a folder):
- Of course, while most appraisers are happy to have you around during the inspection and happy to take the information you have, don’t just assume this. I will always ask upfront, “Do you mind if I stick around during your walk-through” and then before I hand them the folder, I will always say, “I certainly don’t want to do your job for you, but I have some documents here that will give you more information about the rehab I did, the money I spent, and some of the comps I know about in the neighborhood…would you like them?”
I’ve never had an appraiser who seemed bothered by the fact that stuck around during the walk-through (most of them are talkers and like the company) and never had an appraiser who didn’t want my extra information (again, most of them were very appreciative of anything I had).
Do these things, and you can be sure that the appraiser will at very least be “on your side” and hopefully use the leeway inherent in the process to your advantage…
Photo: Erich Ferdinand