Appraisals gone bad!

[Kyle McCorkel]

I am in the "refinance" stage of two BRRRR projects and both appraisals came in very low. We are talking $30K+ low. Major, major setback! So I'm looking for advice on moving forward and also what can be done differently in the future.

Both are SFR's through the same lender. One is Indianapolis (light rehab), the other is in Philadelphia (gut job rehab, all new mechanicals, floors, plumbing electric, kitchen, everything).

I have many thoughts and questions (and I can provide more details if needed), but in the interest of staying succinct:

• I've been told to try a different lender.  How does a lender influence appraisals? I always thought appraisers were independent from lenders.
• It seems that a big influence on the appraisal was the "condition" rating of the property.  This seems very subjective.  For one property the condition was rated "C4" and all the comps looked like distressed sales (for the record, the subject property is rehabbed, not distressed!) The "C3" rated comps are literally $100K higher.  What are the best ways to influence an appraiser's condition rating of your property?
• Another issue is the appraisers are using the previous (distressed) sale of the subject property as a comp.  This doesn't seem legit at all.  I submitted a "rebuttal" on this point and the appraiser didn't respond to this point and didn't adjust the appraisal at all.
• How important is it to have a renter in the property? One property had a renter in place and the other is still vacant as the renter hasn't moved in yet.
• Bottom line is: what is the best way to point the appraisal in the right direction? The appraiser has comps all over the place, between $50K and $250K depending on the block and condition.  I feel like for a refinance, the appraiser looks at the previous sale of the subject property and finds comps to justify that number, causing them to come in conservatively extremely low.  For a conventional purchase loan, the appraiser can see the sale price of the property and naturally usually comes in close to that number (surprise, surprise!) (Side note: as an engineer, I might call this "cooking the books" or "backing into a number") So again, to restate the question: for a refinance, how do you point them in the right direction?

[John Leavelle]

Howdy @Kyle McCorkel

I'm sorry to here about the low appraisals. I am still fairly new, having only completed the whole BRRRR process on 3 properties (SFR, Duplex and 4-plex). I have learned a lot from the BP Forums, Blog's, and Podcasts on preparing for the process. This is what I learned and how I do it.

1.  Get pre-qualified for the Refinance loan prior to property acquisition.  I keep my Lender informed during the whole process.

2. Establish a solid ARV/Market Value for the property based on recently sold comps. I want both distressed and Rehabbed/Rent ready comps to compare with my property. I will usually stay conservative and use an amount on the lower end of the range.

3. Have the property inspected to determine the condition and usable life expectancy of all major components and appliances. Use the inspection report along with GC walk through/bid and SOW to determine the immediate Rehab estimate and CapEx reserves requirement.

4.  Take lots of Before/After photos to document current conditions and finished Rehab.

5.  Optional:  Have my own appraisal at the time of acquisition.  $300 - $600 is well worth the cost.

6.  Prior to the Refinance appraisal I put together a package for the appraiser.  I got this idea from @Ryan Landquist and @Mindy Jensen, and a few others.

This package includes:

A.  One page Property description (Chet Sheet).  Including the square footage of each room and the lot.  A list of all upgrades/renovations.

B.  My original comps.

C.  Inspection report 

D.  SOW

E.  Initial appraisal (if completed)

F.  Before/After photos, photos, photos 

G.  Current comps 

H.  Any other pertinent information pertaining to the property or neighborhood.

All three Appraisers were very appreciative of the time and effort.  It made their job a lot easier.

7.  If the property is rented make sure the tenants have the place clean and orderly.  Have the landscape cut and spruced up.  "First Impressions ".