Appraisal just cost us $20k - how to prevent this?

Question

We are near the end of a flip of a higher end home.  We got it under contract for $400k - $5k in closing costs, but the buyer's agent was concerned about the appraisal, so we put verbage in the contract that said that we would refund their option and earnest monies if the house did not appraise for $395k+

Well, the appraisal came in today at $376k.  Ouch!  So, we signed an amendment to lower the price.

The house is worth the $400k, and the buyers were willing to pay it, but the comps were just not good in the last 6 months.  The appraiser pulled comps from houses in the same hood that are older, not on the greenbelt like ours and not with a pool. The appraiser makes his adjustments for these things (except for the age), but they just don't adjust to market value.

What would you do to combat this or prevent this situation?  Thanks for any feedback!

Jerry Kisasonak · Answer

The link posted was good. Every rehabber has concern about being pounded on the appraisal. It doesn't matter if you have 10 buyers willing to buy at $50K above the appraised value, unless they're cash buyers. A few additional comments:

1. Take pictures of the property AFTER the demo. It looks terrible! And you don't have to provide after pictures. They're on the MLS, and besides, the appraiser is AT THE HOME LOOKING AT IT.

2. On your list of renovation, line item as much as you can. The longer the list, the more work it looks like you've done. Example: Instead of just putting "electrical upgrade," but "All light switches replace. All outlets replaced. New cover plates on every receptacle. New GFCI's in kitchen. New GFCI's in bathroom, etc etc."

Hope this helps!

J Scott · Answer

This is what I would recommend for next time:

http://www.biggerpockets.com/renewsblog/2011/01/19/controlling-and-conquering-your-appraisals/

Shane Woods · Answer

Hey J  Scott, just wanted to let you know that your 3 example links in your article aren't working atm.  I let Josh know.  Not sure how I missed this before, but GREAT article.

Jason Grote, it's not just about RE, in EVERY business and EVERY aspect of your life, rapport is everything.  Or maybe almost everything.  It's all about being proactive and likable.  One thing I've taught several friends and coworkers over the years is, "if you're not a people person, FAKE IT!".  It works.  Your whole mentality changes as you fake it, then you become the people person.  Don't mean to go off-topic, I just feel the need to elaborate based on my experiences every time this subject comes up.

Tevis Verrett · Answer

Buhravo All on the sage words and helping Brother Jason Grote prepare for next time.

My 0.02:

Definitely on being likeable, that sticks-even with the curmudgeons.

My gentle suggestion is to have your OWN appraiser in your war chest.

. . . as knowledge is power, pony up for your own appraisal (with the guy who is sensitive to you).  Present your schweet appraisal to both the buyers as well as the lender.

It will have sway, or at least keep a portion of your $$25K still in play.

Blessings and much luck in your investing, all!

Tevis

Joshua Dorkin · Answer

Shane Woods - I updated the links thanks to your message.  Thank you for helping us to keep things working smoothly!

J Scott · Answer

If Josh can't fix it, I'll upload them again (or somewhere else).  Those templates have served me VERY well, and I'm happy to share...

Jason Grote · Answer

@shane
Thanks for the tip... I love people, so this should be easy!

Shane Woods · Answer

Jerry Kisasonak Great idea on the after-demo pictures.  It's a great presentation tool.  I'll keep this in mind for myself :)  It's not misleading at all, and more accurate than standard "before" pictures because if you had to demo that much stuff, it needs to be documented as such.

Thanks for the tip!

Brian P. · Answer

The fact is appraisers work and income is being decimated and well done formal appraisals are disappearing. And now more then ever they are going to lean in favor of who is giving them the work, in most cases a lender is ordering the work and controlling it even though they are not paying for it out of their pocket. Plus they are being paid less per job and don't want to waste any extra time they don't have to. Their next hire is based on a happy lender, not the person that actually paid for and gave them the work.

Lenders want low appraisals, period, safety not market value rules. Yes, it was that way in the past to some degree but when I started an appraiser was a MAI member and we use to say it stood for Made As Instructed. Lenders wanted to make the loan and if a buyer held on for a couple years the bank could recover their money and not suffer if things went bad. Not like the last decade.

One thing I do presently is ask the listing agent for a printout of the photos on his sold, the trend is for them to take anywhere from 12 to 30 photos and an appraiser can see the comp more completely. I had a case last year where the appraiser was using a comp and got to get inside, but the buyers had done a great job getting it fixed up and the appraiser assumed that was the condition it was in when the buyer bought it, it was only a 6 week old comp. I got the photos from the agent and presented them to the appraiser because he was leaning on that comp as the foundation of his entire appraisal.

Jason Grote · Answer

J  Scott
Thanks for the link to your blog... My wife and I just read it and are wishing we would have been more proactive in the process.  It would have saved us a lot of money.  We'll do better next time :)

Appraisal just cost us $20k - how to prevent this?

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