How to/should I challenge the appraisal?

[Aaron Millis]

Hi BP,

I've heard of people challenging their appraisals on the BP podcast so I am assuming that is a semi common thing. My situation is that I am a realtor helping my girlfriend buy her first property/investment. The plan is to flip it or BRRRR. We are under contract for 80K and expect the ARV to be about 195-205K. The property does need some repairs/updating (windows, refinish floors,new roof, etc) but its mostly cosmetic.

My understanding is that cosmetic related issues don't have a crazy affect on the property value so we expected the appraisal to be significantly higher than our purchase price. But it came back at 90K.

The appraiser was able to see the contract.. which means they saw the price we agreed on, and I feel like that influenced the homes they used as comps and affected the appraised value. The home right next door to our sold earlier this year for 180K and it is 200 Sqft smaller and comparable in every way- but it and other homes recently sold on the same street were not listed as comps. The appraiser used other comps in the area further away.. and I'm thinking it's just because they sold for lower prices closer to our purchase amount.

So my question is what should we do? I don't expect this appraisal to hurt the ARV once the home is fixed up- but I know if the appraisal was higher she could possibly use that extra equity to fix the home up via HELOC (this is exactly what I'm doing now and it is very convenient). Should we do something about this appraisal now or just explain all of this down the road to a different appraiser if we were to want to capture that equity?

[Tamara Deering]

You can challenge an appraisal but it probably won't work. The appraiser reviews the properties that have sold in the area and selects the most comparable based on condition (and yes cosmetics do count). When I'm preparing a market analysis or BPO I have two buckets of properties, As Is and As Repaired. The as is properties are what I would compare the home against so if you are purchasing in an area with a lot of fix and flips chances are there are a significant number of properties that are in similar condition to your girlfriend's place that sold for considerably less than ARV.

When you said the home next door sold for 180k and was comparable in every way, was it really or did it have newer systems and updated cosmetic improvements?

If you want a higher appraisal you will probably need to hire a new appraiser and submit that appraisal to the bank.