How Do I Protect My ARV, from Bank Appraisers that drop $20k-$30k

Question

Whoop! Whoop! YOU bought your very first property for $200,000! You got your rehab budget of $50,000. And after checking the comps you're 'positive' that your ARV is $300,000... After about two months worth of rehab, its finally time for your first Open House. Staging makes the place look fabulous. Fresh Baked Cookies fill the air. Families walk through the house all day long and BINGO! you got an offer, for the FULL ASKING PRICE $300,000...CONGRATULATIONS!!! The young family buying the home can't hardly wait to close on their new home. The last step is that their "BANKER has to send their APPRAISER" to double check the Value of the home before signing over the full $300,000. A few weeks pass and suddenly the phone rings, and it's your Realtor. She says the Bank came back with their appraisal and said that they value the house at $280,000. And just like that, YOU LOST $20,000... your jaw drops, your eyes turn red, steam starts boiling out of your head and you start yelling curse words on the phone and forgot you were supposed to be a Good Christian today. lol.

Here's a scenario that most investors can relate too. This happens more often than we'd like. And for many investors we just suck it up and say "That Sucks!" and move on. But what if I could show you a way to Protect yourself from losing $10...$20...$30,000 on average per deal? What if you we added an extra 'Zero' to this property from the beginning. What if you were buying a $2,000,000 Deal with a $500,000 Rehab with a Target ARV of $3,000,000 and the Bank came back with a $200,000 LOSS! Can that happen? Hell Yeah!...

So here's some friendly advice...

Google: The Chapter of Appraisals in your major City. Search through their website until you find the "Officers". Look for the President of that Chapter. There is usually a phone number, email and or private company. Call Them. Ask them how much it would cost to perform (2) Appraisals: (1) is a "AS-IS" appraisal and a second (1) is an "ARV" appraisal. I've found that Typically it's only $300-$500 on average. Which is REALLY, REALLY CHEAP when your trying to Protect $20,000-$30,000...

So lets say You got a property under contract, so now lets start the due diligence process...

First, we have a detailed walk through of a home inspection report.

Second, we print off 3 copies of the home inspection report and have 3 general contractors bids

The General Contractors will submit 2 Bids: (1) Bid to Fix Each Problem found on the Home Inspection Report "AS-IS" and a Second (1) bid on all the upgrades of added value to the property such as how much it'll cost to install "Stainless Steal Appliances, Granite, Crown Molding Etc..."

Finally the President of the Chapter of Appraisals comes to walk the property.

You hand him the Home Inspection report and the 3 General Contractor Reports to repair the Property "AS-IS"... The Appraiser will compare your property to other properties with similar problems to make an assessment... So the Greater the Documented Problems such as Mold, Foundation issues, Roof Damages, Water Damages etc... THE BETTER!... then the Appraiser has to try to find "similar" homes in the area and compare them to "similar damages" as well. And since he usually cannot find similar homes in the immediate area to compare it too then usually his "AS-IS" Value is usually Lower than our intended Purchase Price. So Maybe the "AS-IS" appraisal comes in at $190,000 because of Bad Mold Problems but you were intending on buying the property at $200,000. Wouldn't that justify asking for a legitimate Price Reduction? Resubmitting your findings using the home inspection, general contractors and the President of the Chapters Credentials?....YES!!!.... and your Money Partners would Love you even more too... But just for kicks and giggles, lets say the "AS-IS" Appraisal comes in at $200,000 and there's no major problems with the property. Then Perfect! at least we know we bought it right!

Now you give the President of the Chapter Appraiser the 3 General Contractors Bids to Upgrade the Property, such as Stainless Stain Appliances, Granite, Crown Molding, etc.. He then goes around and finds comps similar to the type of higher end rehab your intending to put into the property. Now He comes back with an "ARV" Appraisal of $300,000. SWEET!!!

OK finally the rehab process is done and the Open House is Rockin'... Bingo! we finally get our Full-Price Offer for $300,000.

So how do we PROTECT Our ARV from Bank Vultures that want to take away OUR Money?

"TAKE THE HOUSE KEY OUT OF THE BOX!"

As soon as you have a Great Offer in place, take the house key out of the blue realtor code box and don't let anyone in... One day you'll finally get a phone call from your realtor saying that the Bank Appraiser is at the house and he can't get in the property because the key is gone. Immediately take a copy of all the documentation you've gathered and have your realtor meet you at the house to meet with the Bank Appraiser face to face.

Finally, show the Before Pictures of how the property was and the Home Inspection Reports. Then tour around the house and show him all of the Upgrades you've done to the house: Stainless Appliances, Granite Etc..adding Value to the house. Now sit the Bank Appraiser down and show em' the President of the Chapter of Appraisals Reports and say "Do you know who this is? Do you ______________ the President? The guy that's been doing this for 30+ years? (Typically, the bank appraiser is associated with the local Chapter and might have even been trained or certified by this President...) Continue by saying "The President said that if I fixed all the problems in this house and I upgraded the home with all of this higher end rehab that he Valued this house for $300,000. Is there any reason why he's wrong?"

Most every time, the bank appraiser says "No, I don't see any reason why this house couldn't be appraised for the full $300,000." Finally, give the bank appraiser the Copy of Inspection Reports and Documentation that you brought so that he can go back to the Bank with Proof in hand on why he can justify a full $300,000 Value.

I have done this on multiple properties and I have saved myself tens of thousands of dollars... I've protected My ARV! and now my money lenders have more than enough confidence in my abilities as a sophisticated investor see the job through till the end. I AM confident that if each new and seasoned investor took the time to get each piece together correctly it can literally save them Thousands and Potentially Hundreds of Thousands and maybe even Millions of dollars in the long run...

Does anyone else have any thoughts about this style of Protecting Your ARV? or does any one else use other ways to protect themselves from Low Ball Banker Appraisals? Love to hear your thoughts below and thanks for taking the time to read this little article.

To each of you Protect your ARV!

Afa

Eric Swanson · Answer

I've been an appraiser for 21 years, and worked in my mother's appraisal office since 1987. I'd like to make a couple of things clear. First, it is not "YOUR ARV." You don't get to determine value and neither does any appraiser, the market does. The appraiser just reports the value, and at least in Texas, is subject to the highest professional standards in the industry. Second, you didn't get a low appraisal, and neither did your buyer. The party that got the "low" appraisal was the bank your buyer was asking for money. You can make whatever decisions you want with your own money. But when you want to do it with someone else's money, you have to follow some rules. Sorry. These appraisals are not the only word. They can be revised based on new information, they can be replaced by a new appraisal. There are other options available as well. Third, any attempt by an interested party to influence a mortgage appraisal violates federal lending law. Going so far as to hide a key so that you can meet the appraiser "face to face" (i.e. try to intimidate the appraiser) can land you in jail, genius. Fourth, it doesn't matter how much you spent on your rehab. That's not the only factor. The neighborhood is just as important as the house itself. The only way to make money rehabbing a house is to take something below its market potential, and bring it up to what everyone else in the neighborhood is doing. It's this analysis that most flip specialists miss. They have limited capital, and buy whatever house they can afford without knowing what their neighborhood is doing. I do appraisal work in San Antonio, where many residences are up to 130 years old. It's not like I've never faced this problem. We rely on your aggressive entrepreneurial spirit to drive our markets. But not all projects work, and you don't realize how your financial needs are affecting your analysis. It's as dumb as trying to represent yourself in court. I would suggest maybe talking to an appraiser before you spend all this money, instead of just assuming everything was going to work out just because you didn't have the capital to buy the right property in the right neighborhood. The hubris demonstrated in this article is counterproductive, and could end up getting you arrested.