What to do if reappraisal come up short

Question

One thing that's holding me back from purchasing my first property is the fear of "what if my numbers were not correct". I know that you need to do the best due diligence/number crunching that you can before making an offer. But what if I got all my ducks in a row and the reappraisal came up short for some reason?

Say I purchase a $50,000 home, put $50,000 into it and the reappraisal only gives me $100,000 when I estimated $150,000. Since the refinance loan will only give me $70,000, that leaves me $30,000 short on my hard money loan. What does one do in a situation like this? What would you do if it was only $10K short, $5k short?

Steve C. · Answer

@Jon Passow you can always challenge the initial appraisal (listen to Andreas’s Gidelli’s BP podcast).  I tried this on my primary when the appraisal came in short. It worked, not as much as I’d like but we got a bit more in value after the challenge.

You can also try another lender, $500 more to appraise again, but worth it. One thing to look out for, if your lender recommends using a appraisal substitute (where an REO agent comes to view the property instead of a real appraiser and then sends him their findings so he can complete the appraisal, run) generally these agents are terrible & doing this because they can’t make a living selling homes. (In my experience at least) The lender may tout this as saving you a couple hundred on the appraisal, but you really get what you pay for. Apparently this is now common on Freddie Mac loans if the LTV is purported to be 80% or less. Do NOT save a few hundred in cost to lose 10’s of K in value!

Kevin Sobilo · Answer

@Jon Passow, don't use 100% financing for your first deal. Also, if you are a newbie, a hard money lender might not do that anyways. Part of evaluating a good deal is knowing the person executing the plan has the experience and ability to succeed.

So, start by having some skin in the game. Let's say you use $50k of your own cash and $50k financed in some way, well even if the appraisal doesn't come in where you want all you have come up short with is recouping all your cash quickly. You still didn't completely fail and you don't lose your house or anything of the sort.

You will never get rich on your first deal, the experience you get from DOING your first few deals is worth WAY more than you will earn from them in dollars and cents. So, I would measure success differently for those first deals.

Kevin Sobilo · Answer

@Jon Passow, a partner would be good especially if they have experience and can help mentor you along the way. However in my personal opinion I think you should have some skin in the game and come with some of the cash, even if its a minority stake.

Otherwise you aren't really "investing", you are working a self employment gig. Investing implies a return on the money you have invested in my opinion.

Jon Passow · Answer

Good advice. The problem is I don't have the $50k to start. Is that where you would recommend other people's money (ie: getting a partner to front the cash or get a loan?)

Tyler Bushey · Answer

I just dealt with this, I was expecting $360k+ on an appraisal but it came back at $290k.  The comps the appraiser used were distressed with vacant units and below market rents, my building has new roof, siding, decking and superior rents.  The bank wouldn't let me contest it so I have to leave money in the deal instead of getting cash out.  This is why I don't recommend doing real estate without money, it's dangerous.  I'll get a new appraisal in the spring and I should have better luck.

Ian I Leinwand · Answer

A couple of tips. Find a real estate agent that has a good reputation and pull comps and or get recommendations for appraisers to talk to. Talk to some appraisers to find out what they look for in your area. Some areas it's all about square footage and some areas its more about the location and finishes. Talk to your refinance lender about the seasoning time required. The appraiser will see what you bought the property for and factor that into the valuation. With the rehab, you have to show you have added the value. Add value to the property where it counts the most, kitchen, bath, flooring upgrades, roof, new windows. I got burned on my last appraisal because the appraiser saw what I paid (about 12% under market just a few months ago) and pulled bad comps...  and just appraised it for the purchase price. If I had waited to refinance over a year from the purchase date the appraisal would have been much higher. My lender even said it was a lazy appraisal. My mistake was that I didn't add value in the appraiser's eyes even though I fixed and cleaned up the property to get it rent, got a good deal on an off-market property paying cash, got it rented above-market average.

Jon Passow · Answer

How so?

Russell Brazil · Answer

Chances are if youve never dealt with an appraiser before, the appraisal is going to come in much lower than you expect.

What to do if reappraisal come up short

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