Indianapolis - Appraisal came in low, any way to get it adjusted?

Question

I purchased a property in Indianapolis at a good price ($39k), well below what the comps show for the area ($50-60k for rental grade, $80-100k for retail). However, because the appraiser knew what the purchase price was, his appraisal came in just above that value so that it was just enough to cover the loan.

My strategy when buying the property was to buy it at this low price so that I would have a good amount of equity when purchasing it, so that in the next year I could re-finance the property, pull the equity out, and use that equity to purchase another property. However, now that the appraisal came in low, there isn't enough equity to do a cash out re-fi. If I were to re-finance I would obviously have to get a new appraisal and this one wouldn't make a difference, but had this one appraised for the value of the comps I would feel more comfortable with the strategy in a year. But with that appraised value, now if I were to look to re-fi, I'd essentially be forking over $400 and crossing my fingers that the appraisal comes in where I would expect it to based off the comps, but if it doesn't I'd just be out $400.

Is there any way to get an appraiser to re-evaluate? If not, when looking to re-fi, is there a way to get the appraiser to forget about the purchase price and value it properly based on the comps?

Matthew Schroeder · Answer

Rodney,

I am going to share my quick comments with you here, but feel free to give me a ring if you would like to discuss further.

Any appraisal uses a vast array of subjective factors which influence the value estimate - said another way, if you review the assumptions, question them, and provide additional supporting data, there is a likelihood that you can influence/change the appraisal.

I formerly did market valuations ("appraisals") of $50 - $100 million hotel & resort projects for a Big 4 accounting firm, and the number of subjective factors which influence the value are enormous.  Change one of the major assumptions, and you change the results - actually quite simple.

I don't know the specifics of your property, but I would thoroughly review the "sales comps" that he used.  Make sure that they are "truly" comps - same neighborhood, recent, similar size/layout, etc..  In Indianapolis, where properties change block-to-block, this is really important.  If you could find better comps than what he/she utilized, send them to the appraiser.

On our properties, we are always actively involved in the appraisal process from the outset, and we always pull our own comps, and if they are supportive of a valuation that we like, we share them with the appraiser.  The appraiser is under no obligation to use them, but if you have good support, he/she should consider them.

On our last cash-out refi, the appraiser initially used a sales comp which was more than 1 mile away from our property (a totally different neighborhood), and the transaction was 11 months old.  We found & sent him a comp (with all of the supporting data, including the MLS# so he could verify it himself), which was less than 2 blocks away from our property and only 1 month old, and as a good appraiser, he considered it.  Because our comp was much better than his comp, he adjusted his analysis.  In that specific, the difference between the two sales comps was approximately $50,000, and we got the value in the appraisal that we wanted.

He also likely did an "Income Capitalization" approach (simply, forecasted cash flow and applied a cap rate).  That is too involved for this post, but you should review that as well.

Once again, feel free to give me a call and we can discuss more.  Also, if you would like me to review the appraisal for some input on the assumptions used, just let me know.

Best,

Matthew

Jon Holdman · Answer

@Rodney Kuhl  when you go to refi this current appraisal just isn't going to come into play.  Its not recorded somewhere.  Its between you, the lender and the appraiser.  Good or bad it just won't matter when you refi.

What may be a problem is that the price you're paying will be recorded and will, potentially, be a comp for other properties.  And it will get a look when you refi.  If you've done work to justify a higher value the appraiser will consider that.  If not, then, yeah, this purchase price may make it come in lower than you hope.

Evan Manship · Answer

@Rodney Kuhl

Couldn't agree more. It seems that your appraiser has some lingering interest in what the number came out as. Any transaction that wasn't truly arms length should be adjusted if not entirely omitted. Things like short sales, REOs, and distress sales are not truly indicative of value. Also, cash sales often receive a discount and should be adjusted accordingly.

Just some thoughts. You should give your appraiser a call and discuss.

Rodney Kuhl · Answer

@Evan Manship @Mike D'Arrigo @Guy Raveh Thanks for the input all of you! What's weird is that a couple of the properties on the appraisal actually sold this summer for over $80k but he has them listed at prices they sold for cash at under $40k (obviously hurting the value). He also used active listings, including one that is a short sale. From my understanding, they have to be sold comps, so that doesn't seem right either.I get appraisers not wanting to go to high as that can raise red flags so they want to cover themselves, but they should still fairly value the property.

Rodney Kuhl · Answer

@Jon Holdman Thanks for clarifying that! That's what I've come to learn. Frustrating that buying a property as a good deal (meaning, below market value) can actually hurt when it comes to valuation down the road.I understand that this appraisal wouldn't come into play were I to re-fi down the road, but it would have provided some security to me that I'd be able to get the value I'm looking for in an appraisal in the future.

Rodney Kuhl · Answer

@Guy Raveh After discussing with a mentor who spoke with a few other realtors and another appraiser, we were told that on purchases, appraisers know the purchase price and will come back with an appraised value just to cover the purchase price. During a re-fi, however, an appraiser doesn't have a value in his head and will have to go about properly evaluating and analyzing the value of the property. All of those realtors agreed that the market value is higher than what the appraisal says, so that's encouraging.

Guy Raveh · Answer

@Evan Manship and @Rodney Kuhl I agree with both of you. You should challenge the appraisal. How did you get this appraiser? Usually the lender orders the appraisal. If so contact the lender and ask to challenge the appraisal with your supporting argument and  sold comps.

Rodney Kuhl · Answer

@Evan Manship Yeah, basically I think he saw the purchase price and just figured out a way to cover that.Am I allowed to talk directly to the appraiser by Dodd Frank rules?

Guy Raveh · Answer

Hi @Rodney Kuhl I think most appraisers have a hard time appraising a property for a much higher value than that which it has just been purchased for. You mentioned refinancing "in the next year". Does this mean 12 months from now? In 12 months from now I strongly believe you will get a much better / higher appraisal if the market continues to go in the direction that it is going now.

(I just re-read your post again and so deleted the second part of my post that was not relevant)

Mike D'Arrigo · Answer

@Rodney Kuhl

I just had an Indianapolis appraiser on my radio show Saturday and we talked about this very thing. Did you do any work to the property? We always show the appraiser a scope of work. We also show them HUD statements of any properties that were sold but not reflected on the MLS but it sounds like the appraiser ignored the comps that were available. It's unlikely that the appraiser is going to change it.

Indianapolis - Appraisal came in low, any way to get it adjusted?

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