Appraisal came back $35,000 lower than sales price (Turnkey)

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Appraisal came back $35,000 lower than sales price (Turnkey)

Daniel Mills
Investor · Kusatsu, Shiga · Member since 2015 · 147 posts · 87 votes

OK. So here is the situation. I was in the process of purchasing a rental property through a Turnkey company that was asking $261,000  that just appraised at $226,000. Of course, I am not paying the original amount and I have sent an email asking if they will lower the sales price to the appraisal amount. I haven't heard back yet, but I am guessing they will dispute the amount and say that they will pay for a second appraisal. This is a bit worrying because I know that some appraisers who get a lot of business from the company might try to fudge a bit to get the sales price they want, right. So, I am planning on asking if I can choose the appraiser. I am just wondering if there is anything else I should consider to make sure that I don't get taken here. Any advice would be greatly appreciated.

Thanks,

Daniel

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Tae C.
Flipper/Rehabber · Knoxville, TN · Member since 2017 · 130 posts · 72 votes
8y

@Curt Davis

In all the experience you’ve had with your turnkey business, what chance does the potential buyer have of you as the TK company being willing to accept a lower price that is closer to the actual appraisal?  I do not ask this in a critical manner, but really out of curiosity and for educational purposes.  In your previous responses, there didn’t seem to be much mention of the real possibility that the TK provider might seriously consider lowering their price.  The examples you did mention that have taken place with Buy Memphis Now potential clients, you recommended that the buyers use your preferred lenders whose appraisers would bring in the necessary value on a second appraisal.  That seems slightly off to me, as doesn’t it make more sense for any potential buyer/client to have their own lender of choice order their own appraisals in doing their own objective due diligence vs. relying on an appraisal from a lender that has close ties and repeat referrals with the company that is selling them the property?

Obviously to me, it wouldn’t make sense in this particular scenario for the TK provider to lower their price by $35k off the original asking price, that would be quite unreasonable to expect I think.  But say the appraisal came in closer to $240k - would you be willing to meet the buyer in the middle at, say $250k?  It’s all a case by case situation of course, and heavily dependent I’m sure on how much the TK provider actually has into the specific property and what their desired margins are (though desired vs. necessary might be different numbers)...but I’m just curious as a whole, business approach-wise, how you would respond in this type of scenario.  

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    8y

    We have had a few situations like this happen in the past and it was usually bc the buyer wanted to use their lender. When the appraisal would come it too low we would ask the client to switch to one of our preferred lenders and 99% of the time the home then appraises for the sale price. 

    Few things:  Did the seller ever show you sales comps before the appraisal? Most companies normally do not miss their mark by this much. If the lender does allow for a 2nd appraisal neither you or the seller will get to select them. At the end of the day, if the home is re-appraised and it does come back in at or close to their original asking price you should go with it. You were willing to buy it for that price before so I am assuming it is a good deal as long as appraisal comes in closer to price. 

    Good luck !!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    is that a multi family unit.. ??

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  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    8y

    @Curt Davis Should a buyer be comforted by a second appraisal that enables the purchase to move forward at the original purchase price? 

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    8y

    @Tom Gimer

    Good question. The times when something similar has happened to me in the past I will provide legit comps to my buyer to show them that the price I have it as it in line with other sales in the area. 

    It is hard to get a lender to do a 2nd appraisal, they normally do not which in the case above will usually kill the deal. 

    There are also appraisers out there who are not friendly to turnkey companies and will not provide a good report. It is said that if you had 10 appraisers appraise the same home they should all be within 5% of each other. Sadly this is not normally the case. 

    If the buyer is not comfortable they should not move forward but the goal of a transaction is to close so if the seller can prove their sale price is valid and get a 2nd appraisal, then there should be no issue moving forward. 

    Thanks !!

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  • Tae C.
    Flipper/Rehabber · Knoxville, TN · Member since 2017 · 130 posts · 72 votes
    8y

    @Curt Davis

    In all the experience you’ve had with your turnkey business, what chance does the potential buyer have of you as the TK company being willing to accept a lower price that is closer to the actual appraisal?  I do not ask this in a critical manner, but really out of curiosity and for educational purposes.  In your previous responses, there didn’t seem to be much mention of the real possibility that the TK provider might seriously consider lowering their price.  The examples you did mention that have taken place with Buy Memphis Now potential clients, you recommended that the buyers use your preferred lenders whose appraisers would bring in the necessary value on a second appraisal.  That seems slightly off to me, as doesn’t it make more sense for any potential buyer/client to have their own lender of choice order their own appraisals in doing their own objective due diligence vs. relying on an appraisal from a lender that has close ties and repeat referrals with the company that is selling them the property?

    Obviously to me, it wouldn’t make sense in this particular scenario for the TK provider to lower their price by $35k off the original asking price, that would be quite unreasonable to expect I think.  But say the appraisal came in closer to $240k - would you be willing to meet the buyer in the middle at, say $250k?  It’s all a case by case situation of course, and heavily dependent I’m sure on how much the TK provider actually has into the specific property and what their desired margins are (though desired vs. necessary might be different numbers)...but I’m just curious as a whole, business approach-wise, how you would respond in this type of scenario.  

    10Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    8y

    @Tae C.  That is a great question.  If an appraisal comes in low, say within $5-6k we might ask to split the difference with the buyer. In the event it is much more say, $10k or more, we can only lower the price so much and we do not expect a buyer to come out of pocket more then they feel comfortable so we do understand there is a potential the deal will fall through and we then refund the buyers earnest money. 

    Though we do not force or require our clients to use our preferred lenders, transactions do go more smooth if they do which also eliminates in most cases any appraisal issues.  At the end of the day our goal is to have a successful and smooth ( as much as possible ) buying process. If a buyer uses their own lender and we have an appraisal issue that we can not resolve with their lender we do ask for them to switch to our lender and lets try it our way this time. If the appraisal comes in fine ( which it usually does ) then great we keep moving forward.

    Hope that answered your question to some extent, thanks !!

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  • Daniel Mills
    OP
    Investor · Kusatsu, Shiga · Member since 2015 · 147 posts · 87 votes
    8y

    Thanks, guys. this has given me a lot to think about. I really appreciate the insight from@Curt Davis as a Turnkey provider. But, this is such a discrepancy in price between what they are asking and the appraisal. I have bought some lower price point properties in Memphis that appraised a bit lower, a couple grand, and I did close. I am happy I did because the price came up quickly as investor demand has increased. however, those properties cash flowed really well even at the sales price. In contrast, this home was one that is just breaking even and I was buying it because I see future appreciation here. M¥ost of my properties are cash flow oriented so I thought it would be ok to balance the portfolio with one property more focused on capital appreciation. So I can't really see myself paying so much extra for the property here. 

    As a side note, this is their preferred lender. I don't have much choice here because I live and work in Japan. I have been using this lender to get conventional mortgages for years (TN, AL and refinance in ID) and they really understand my situation. in the past, when I have used other lenders it's either taken a long time to close or the deal fell through. If the only way to move forward is to change lenders, I won't do the deal. I've already lost months doing this deal, so I think I will just return to my other markets. 

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  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    8y

    Have you done a lot of due diligence online yourself? Looked at the comps that your seller provided? Looked at the comps this appraiser used? 

    For example, I was just trying to refinance one of my properties and the lender's appraiser came in with an appraisal of 80K, which floored me. He used a 9 month old comp in an area that's on fire right now. He used another comp that was 3 doors down, same size, but I had been in it and it needed a lot of work. So, the refi fell through. 

    I just went with another lender and wouldn't you know it? When they ordered the appraisal from the pool of appraisers - the same appraiser contacted me. I vetoed and they sent someone else. The appraisal came in at 117K.

    So, the property may be worth a lot less than the seller thinks or the appraiser used comps that support the lower price, but there are also comps that support a higher price. 

    But sounds like this might give you an out, if the property isn't even cashflowing. If they don't come down in price, I would walk away from this one. 

    2Reply
  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    8y

    261,000?  Is it a package of 2-3 turnkeys?

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    8y

    That is a huge swing. What kind of property is this? SFR? MF?

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @James Wise sounded like a higher end SFR that he is buying for future appreciation... ( can hear the moans now on BP LOL).

    its not uncommon in my experience in the mid west at those price points for remodled SFR's to have an appraisal come in light. For instance in Dallas this happened on virtually every single flip we did there.. its why I exited that state.

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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    8y
    Originally posted by :

    Though we do not force or require our clients to use our preferred lenders, transactions do go more smooth if they do which also eliminates in most cases any appraisal issues.  At the end of the day our goal is to have a successful and smooth ( as much as possible ) buying process. If a buyer uses their own lender and we have an appraisal issue that we can not resolve with their lender we do ask for them to switch to our lender and lets try it our way this time. If the appraisal comes in fine ( which it usually does ) then great we keep moving forward.

    Wow, I am speechless. Of course a sale is smooth if  customers pay you 20% over market with cash. What could go wrong? The fact that the clients appraisal doesn't match your selling price is a huge red flag that the price is inflated. Unless your market is moving so fast that comps can't keep up. Which I seriously doubt is the case in Memphis!! Even if a second appraisal is warranted it should be an independent one.

    10Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    8y

    @Account Closed I was also surprised by that response.

    Since "the goal of a transaction is to close" that just requires a preferred lender to help make it happen. Gee, I wonder which comps they are relying upon.  

    Just read another thread where the turnkey company seven days later flips it for $30k+ profit. Imagine all the hard work they put into that one to bring it to turnkey condition and oh, I'm sure the property appraised just fine. Out of state buyer, never saw the asset. Hmm notice anything similar here? Guy goes to sell it 2 years later and shocker it appraises for $30k less.

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  • Tyion Bridgeman
    Real Estate Agent · Atlanta, GA · Member since 2014 · 135 posts · 40 votes
    8y

    This happened to me before when the market we were in was changing pretty rapidly and their weren't any close enough comps that have recently closed for the appraiser to base his judgment off of. Appraisers have strict standards on what comps they can and cant use. All this is to say, just because it appraised at one amount doesn't mean it isn't worth the original purchase price. The fact that you were willing to buy it for that proves it is worth it, right?

    0Reply
  • Daniel Mills
    OP
    Investor · Kusatsu, Shiga · Member since 2015 · 147 posts · 87 votes
    8y
    Hi guys, Yeah, this is a SFH in one of the SMILE cities. I have 8 other rentals in the US, some conventionally bought and some turnkey, and all of them are cash flowing properties that I bought on that basis. Two of those properties appreciated and I decided to do a cash out refinance. Because the other properties are cash flowing and I have a well paid job I thought I might take a risk this time around and purchase a property “mostly” for future appreciation. The rent should cover PIMI and property management, but not maintenance and vacancy. I’ve been a bit worried about this strategy but...
    0Reply
  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
    8y

    Sounds fishy to me!!!! Red flags all across the board, seems to me that a buyer should be able to use whomever they want to purchase a property IMO....

    3Reply
  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    8y
    Originally posted by @Daniel Mills:

    Hi guys,
    Yeah, this is a SFH in one of the SMILE cities.

    What is a SMILE city?

    2Reply
  • Account Closed
    Investor · Saskatchewan , Saskatchewan · Member since 2017 · 311 posts · 233 votes
    8y
    Did I read that correctly that you’re being told property management and maintenance aren’t included in cash flow calculations?... why the heck not? That’s like saying “$500 monthly cash flow.... it that doesn’t include mortgage payments...”
    0Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    @Daniel Mills I would take a hard firm strategy when dealing with the turnkey investment company.  As you can see from some of the responses you have received, having a "preferred lender" who can "get the appraisal numbers to work" should bring HUGE RED FLAGS sailing your way.

    Now, to be fair, sometimes a bunky appraiser can get thrown into the mix and deliver a low appraisal.  Those infrequent times are usually pretty evident because the comps you can find yourself justify the higher price.  However, appraisals are done FOR A REASON!  An appraisal is the only way that you as the investor (especially out of state) can have confidence in the value you are being sold.

    If it were me, I would submit to the Seller (turnkey provider, or otherwise, the advice is the same) that you are willing to purchase the property for the appraised value.  If the Seller is unwilling to adjust the purchase price to the appraisal, then you would like to cancel the transaction and have your earnest money returned to you.

    You shouldn't have to pay for the Seller's pricing mistake.  They should have to take it in their cut of profit.  Remember, YOU are an investor!  Don't start out behind in equity by buying this over what it is worth.  No doubt they may have fudged on the income numbers too, so you will have NO flexibility once you close.  Bad news.

    I am sorry to deliver such bad news.  However, this is one of those deals where you have to rely on the process in place, and the resources that are there to protect you.

    Best of luck to you.

    9Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @Cara Lonsdale this is happening in many markets its happened to me in Texas so often I quite buying and rehabbing there.. values rose.. buyers ( and these are FHA home buyers) pay the asking price but appraisal comes in light.. guess what happens FHA buyer does not have the difference they want you to lower the price.. or you have to start all over .. so from a sellers stand point its an issue.

    had it happen in Vegas as well were values are moving up quickly.

    in Oregon and CA and WA  we have not seen that  ( although I had one in sacramento come in a little light but not too much...)

    we are building new construction 1 mile from 27 homes I built last year .. the exact same model floor plan same lot same school etc.. we are selling that house for 75k more than last year.. that's a 20% bump one year LOL and its only costing us maybe 10k more to build it and lots cost were the same.

    My Wife ( our listing agent) was a little worried about apprasials but we have had now issue and she sold 10 in the last 2 months and we even raised the price 5k more on a few and sold a few of those.

    I have run into this appraisal issue in the mid west for the last 20 years..  they are all over the board. And to me in the mid west simply a guide line.. the ONLY people that pay appraised value basically are investors from out of state..  Locals will always offer less ALWAYS..

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  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    8y
    Originally posted by @Daniel Mills:

    OK. So here is the situation. I was in the process of purchasing a rental property through a Turnkey company that was asking $261,000  that just appraised at $226,000. Of course, I am not paying the original amount and I have sent an email asking if they will lower the sales price to the appraisal amount. I haven't heard back yet, but I am guessing they will dispute the amount and say that they will pay for a second appraisal. This is a bit worrying because I know that some appraisers who get a lot of business from the company might try to fudge a bit to get the sales price they want, right. So, I am planning on asking if I can choose the appraiser. I am just wondering if there is anything else I should consider to make sure that I don't get taken here. Any advice would be greatly appreciated.

    Thanks,

    Daniel

    IF it were me, I would demand they lower the price, and then if they don't consider walking, you almost certainly can get a house at the appraised value.  

    Seems to me buying drastically over the appraisal just means you are over paying, and gives you no other outs if the deal doesn't cash flow like you hope/expect. 

    2Reply
  • Daniel Mills
    OP
    Investor · Kusatsu, Shiga · Member since 2015 · 147 posts · 87 votes
    8y

    So, I got a little more information today on how the Turnkey company came to the list price. It seems that they used off-market comps, which they say are very common in the area. I can't validate that, but as an investor that's a bit troubling because when I go to refinance or sell the property I will most likely be using the on-market comps. Of course, this is a question I should have asked from the beginning. So, the company is offering this info to the appraiser and seeing if they will take it into consideration, but I think it is unlikely they will. Good lesson for me that will cost me the appraisal fee. 

    0Reply
  • Daniel Mills
    OP
    Investor · Kusatsu, Shiga · Member since 2015 · 147 posts · 87 votes
    8y

    @Account Closed - I hope this explains SMILE - SMILE

    0Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    8y

    Losing an appraisal fee is nothing compared to being $35,000 underwater from day one

    8Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Jay Hinrichs:

    @Cara Lonsdale this is happening in many markets its happened to me in Texas so often I quite buying and rehabbing there.. values rose.. buyers ( and these are FHA home buyers) pay the asking price but appraisal comes in light.. guess what happens FHA buyer does not have the difference they want you to lower the price.. or you have to start all over .. so from a sellers stand point its an issue.

    had it happen in Vegas as well were values are moving up quickly.

    in Oregon and CA and WA  we have not seen that  ( although I had one in sacramento come in a little light but not too much...)

    we are building new construction 1 mile from 27 homes I built last year .. the exact same model floor plan same lot same school etc.. we are selling that house for 75k more than last year.. that's a 20% bump one year LOL and its only costing us maybe 10k more to build it and lots cost were the same.

    My Wife ( our listing agent) was a little worried about apprasials but we have had now issue and she sold 10 in the last 2 months and we even raised the price 5k more on a few and sold a few of those.

    I have run into this appraisal issue in the mid west for the last 20 years..  they are all over the board. And to me in the mid west simply a guide line.. the ONLY people that pay appraised value basically are investors from out of state..  Locals will always offer less ALWAYS..

     I understand HOW it happens.  I just feel like we should've all  learned our lesson from the not-so-long-ago past.  I just would caution anyone on the Buyer side of the transaction to move forward by paying more than an appraisal will support.

    This is EXACTLY how the bubble burst happened.  We saw it here in AZ too.  Every time a property would close, the next one would be listed $25K or more higher.  Buyer and Sellers were having to sign market conditions advisories to acknowledge that appraisal may not support purchase price.  It was crazy.

    In the end, it comes down to being able to support the purchase price with verifed closed sales.  In the absence of that, I would not move forward.

    2Reply
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