How best to challenge a low appraisal

Question

I just completed a BRRRR, having invested a total of $150,000. I had estimated that it would appraise for $200,000-$250,000. The appraisal came in really low, ($132,000). In reviewing the appraisal, the comps average about $175,000. Its a 4 unit, with two units already rented at $800 and $900 at the time of the appraisal. The appraiser estimated the other 2 units to rent at $700 each, but the just rented for $925 and $975. How do I best approach the bank and/or appraiser to try and get a higher appraised value.

Thanks for any thoughts.

Jeff

Thanks for any thoughts.

Jeff

Brad S. · Answer

Longtime Appraiser here (amongst other things...)

First - Without specific client permission (which doesn't happen with lenders), the appraiser can only discuss appraisal results with their client, and if this appraisal is for a lender, the lender is the client, not the Borrower. The proper channel would be to do a rebuttal through the lender.

The best way to rebut an appraisal is with facts. providing more appropriate comps, explaining (factually) why they are more appropriate and why the comps utilized are inferior. Sometimes you can get specific information directly from the agents involved in those transactions, which the appraiser may not have got. You can call those agents and ask them to verify facts about the comp which may have contributed to a reduced sale price (like inferior condition, bad location, highly motivated seller situation, etc).

Unfortunately, the income approach is not typically very useful in 2-4 unit properties, since rents typically vary widely, due to many unknown variables. You can explain why you are getting higher rents and maybe state why your units are better then the rental comps with lower rents. But again, use facts...like your units are fully updated and the comp units appear to be in original condition, etc.

Also unfortunately, there are typically fewer comps for 2-4 unit properties than for sfr's, so there is usually little sales data available, and then the appraisal becomes based more on the appraiser's opinion, as opposed to facts. Also, the average of $175k doesn't say much about anything, that could be 1 at $250k and 1 at $100k, but if you said 4 out of 5 comps are over $150k, then that would bring up other questions.

What factswere you basing your opinion of value on?  And what "facts" or missing facts in the appraisal do you think may be contributing to a lower appraised value?

Keenan Fitzpatrick · Answer

My best experiences are to be proactive and provide the info to the appraiser beforehand. Another tip, that will only help you in the future lol, is to use a lender that has a better chance of getting a good appraiser. You can't pick your appraisers like you could in the wild west days but some lenders can file file complaints and have them taken off their list of acceptable appraisers. Your situation may be one of those ones that might justify such a response. I'm not sure exactly how to navigate those situations since I'm not a lender but everyone in the business runs into this conversation sooner or later and that's what I've heard a few times.

As for information you can use now, I'd still contact the appraiser to talk to them about the appraisal and see if you can find info to challenge the values. Sending them the leases for the higher value is a great start. Sending them 3 comparable properties with factual breakdowns for any adjustments would be a great follow up. Remember to have accurate calculations for adjustments in different bedroom count, or size etc. What I mean is, if they use $5,000 per bedroom then that's what you use. Lastly, a list of repairs and upgrades with the costs associated with them will finish of an analysis that I would produce.

The values you have are much different than what the appraiser gave you so you have a mountain to climb but I hope you can do it. The last option would be to switch financing types so you can get a different appraisal or wait for this one to expire and get another one. Good luck!

Eliott Elias · Answer

You can't do much except show them comps. The challenge should have been done before the appraiser came out

Tim Miller · Answer

I would do as Brad Sand suggest but you didn't say what type of appraisal they did. Is this for a commercial loan or personal? The bank should have order an appraisal based on rental income. Taking all 4 units at $700 a month, the property should have appraised for $252,000 at 7.5 times yearly rent. If they won't budge on this appraisal, either have a new appraisal done or fine a new lender. Good luck.

Jeffrey Schratz · Answer

Thank you all for the info. I will let you know how it goes.

Travis Hill · Answer

@Jeffrey Schratz

Who was there from your team to assist/meet the appraiser? I offer a couple suggestions:

-show the before and after of the work performed in a binder/folder.

-have your contractor meet the appraiser there and discuss what they did. Let this be an opportunity to brag.

Like the other posts state, talk to the lender. Personal or private property. Reevaluate your numbers and ARV.

How best to challenge a low appraisal

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