Multi-Family appraisal falling short

[Dante Ritchey]

Hello everyone,

My brother and I are in the middle of our first house hack in Massachusetts. We have the house under contract and everything has gone through except now we are stuck at the appraisal. It is a deeded two family house that was turned back into a single family and needs roughly 15-20k out into it to bring it back to a multi family. We knew this and offered accordingly although now the appraisal has come in and at our agreed upon price we are 40,000 above the single family appraisal price. The appraisal came in above our offer contingent on it being converted back to a two family before closing. As we understand our only options now are to either fork over the additional 40,000 keeping it as a single family in the eyes of the bank or see if we can come to agreement with the seller to return it to a two family before we close, allowing it to appraise. I figured it was best to post here to see if anyone has any creative ideas that may help us get over this hurdle? 

*we are in the middle of an appraisal dispute right now, although for the area there are not many recent comps in both time and proximity so we are not very confident this will help us but we are trying this currently.*

Sorry for the long winded post but looking forward to hearing from you guys to see any creative ideas you may have.

Thank you in advance for all of your help!

[Brad S.]

OK, Appraiser insight here (Me):

if I understand correctly, the property is currently an sfr as-is, which has a value $40k less than if it were converted back to a duplex. 

Do you know if it was legally converted from the duplex to the sfr?  ...with permits, legal under current zoning, etc. If it was done illegally, the lender most likely would've wanted the appraisal done as a duplex, while taking into account what it would take to convert it back (adding the few walls, as you say). The appraiser could do what's called a "cost-to-cure" adjustment, taking into account the cost to convert the sfr back to a duplex.

If the sfr is legal (converted with permits, etc), the lender probably asked the appraiser to appraise it as-is, as an sfr. 

Understand, this isn't an appraisal issue, it is a Lender issue. The appraiser is just going by the lender's guidelines and direction. As an appraiser, I can appraise it as a duplex, and put a cost-to-cure adjustment to account for the conversion back to a duplex, or I can appraise it as an sfr (assuming it can legally be an sfr). It doesn't matter to me, as the appraiser, but the lender tells me how they want it. Depending on their underwriting guidelines, I assume. 

Usually, duplex zoning (or higher density zoning) would also permit sfr's, so, my guess is that it is legal as an sfr. But, the conversion from the duplex to an sfr may not have been legally done. that's something that should've been taken into account by the appraiser, if they reasonably should've been aware of that issue. 

You could ask the Lender if they could value it as a duplex and have the appraiser give it a cost-to-cure adjustment. You should try and make the case that it's Highest and Best Use is as a duplex, and it was a duplex and you plan on converting it back to a duplex, etc. And it can readily be done with minimal cost and effort. Usually they have a threshold (per their guidelines) for a cost-to-cure before it's an issue, around $10k or so, depending on the property value possibly.

But, it also sounds like you don't know exactly how much it would be valued as a duplex. It may or may not be $40k higher. The appraisal would not/should not have said that.

Also, FYI, the appraisal is not YOURS, it is the LENDERS'. It is done for the Lender, as the client, not the Borrower. This is a common misperception. You didn't mention this, I am just clarifying for informational purposes.