BRRRR - Low Appraisals

[Matt Inouye]

Hi BP Community,

I recently encountered a situation with my primary residence that got me thinking about how it might impact my use of the BRRRR strategy.

I recently refinanced my personal residence with about 60%LTV. With (30 day old, same tract) comps in the area well north of 1.1M we were pretty confident we would get the most advantageous pricing pricing and rate on our refi.

My wife (a local RE Agent) and I were both shocked at how low the valuation came in at.  The appraiser priced our home below our purchase price 2 years ago and despite our putting nearly $40K into the kitchen and flooring when we first moved in.  We also toured some of the homes that recently closed for 1.1M and their interiors were dated by about 15-20 years.

This cost us 1/4 point on the refi fees (not rate) as our LTV was 61% and not below the 60% cutoff for the better pricing on the loan.

My concern is that the BRRRR strategy hinges on being able to get the valuation necessary to refi the property. What happens if the person appraising your house is just in a bad mood or is super off.

Has this ever happened to anyone of you out there in the BP community and how have you overcome this for your rentals.  Also, to any lenders out there, is this standard nowadays for conventional financing with the super strict TRID laws?

Big time Mahalo in advance!

Matt

[Ryan Deasy]

@Matt Inouye this has happened to me three times and many other times to my real estate investor friends. i have completely lost confidence in appraisers. i agree with you in that there are many factors outside your control that can effect your valuation. Also, yes, BRRRR hinges on a quality appraisal.

one of the times the appraiser came in at 170k. i lost my mind, literally. i argued and argued and found my own comps and sent them to him. he came up to what i thought it should be which was 255k. could you imagine being off by 33% as an appraiser? it’s honestly disgusting.

another time i wrote a 5 page rebuttal and they wouldn’t move.

another time i wrote a 2 page rebuttal and they move up slightly.

i highly recommend you spend 4-5 hours and put together a document with research and comps etc that you can send to them. i’m very passionate about this topic. for us real estate investors this is massive.

[John D.]

@John Center I have found in many cases, appraisers are comfortable with appraising at purchase price + cost of rehab, assuming you spent that money wisely and the finished product has assumed the value of the rehab money spent.  It can be very hard to get an appraisal above purchase price + cost of rehab, if the time from purchase isn't that long and if there aren't lots of very relevant nearby comps.  Most of my homes are large and somewhat unique, and the cost + documented rehab spent = appraised value formula is the one I run into the most, when cash-out refi'ing a property we have recently purchased and remodeled.

[John D.]

@Ryan Deasy I've contested a number of appraisals as well.  I can typically get a ~10% upward adjustment with a well reasoned and worded rebuttal, if the case is there to be made.  With our higher price point somewhat unique properties, appraisals tend to come in conservative to start.  Even with the 10% kicker the appraisal value is significantly less then I could sell the property for (our typical buyer is an investor that would base much of their purchase price off of rental income), but given appraisal value comes from comps of which there aren't many, and given rental income is correlated with property attributes that appraisal value often doesn't line up with, so is life.

[Tracey Callison]

@Derek Daun

I agree that it’s more an art than a science. We bought 12 years ago in a stable neighborhood between two fast-growing municipalities, so pricing has gotten very competitive. We wanted to refi and use the money to pay off everything else (student loans, repairs, leftover debt from a startup). the first lender used a non-local appraiser who used comps in neighborhoods on the other side of town that were nowhere like ours. It’s hard to find comps here, as we are the smallest home on the street (3/2, most are 4-5/3), but the number was insultingly low.

Decided to try again with a local lender; we were able to time it so our house had been repainted before it was done and did some yard work— 3K paint job brought us up 80K in appraised value. The local guy knew the neighborhood and area well and was able to find true comps.

I keep a running search in Zillow for our zip and flag everything that looks comparable so I’ll have a list ready to go when we need it. I definitely feel like using a local credit union made a difference.

[Jonathan Seyfert]

Thanks for the posts everyone - this has been super educational to read as a newbie investor. BiggerPockets amazes me that we can access the opinions of so many people with varied experiences!

Have heard people mention there is a possible utility to having an appraisal when you first acquire the distressed property before rehab. This doesn't make total sense to me since it doesn't take into account what you end up doing with the rehab - and to be honest I may have misunderstood the recommendations -  but wanted to ask if there is any merit to this?

Any utility to having an appraisal contingency and paying for an appraisal before you buy the distress property?

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Also, some talk here of credit union/local bank vs large bank. Is it preferred to go with a local bank that has knowledge of your area for BRRR or does it matter more what specific lender you are actually working with?

Thanks for your thoughts,

Jonathan