Appraisal came in low. Now what?

Question

I applied for a mortgage with Bank of America about 5 weeks ago.  I'm supposed to close on this 2 family on 3/27.  I've been bugging them for the past week because they haven't had the appraisal done yet.  Finally today they called me and said the appraisal came in at 22K.  The purchase price of the house was 26.5K and the loan was supposed to be 21,200.  So they won't give me the loan because it's at 96% LTV.  So I say give me the loan for whatever is 80% of 22K (17,600) and they say they'll call me back.  Some nitwit in their underwriting department calls me back later in the day and tells me that they won't give me the loan either way because the appraiser didn't like the "condition of the house".  I asked him to elaborate and he tells me that it looked like one side of the roof was replaced recently and the other side wasn't.  Well, that happens to be true, but SO WHAT!!??
            
            Anyway, my contract is contingent upon getting mortgage approval so I can get out if I want to.  But I think I want to do the deal anyway because the numbers are very good.  I can just pay cash and get the money from my HELOC.  Has anyone had a similar situation?  How accurate are appraisals really?  If I'm paying 26.5K for a house that appraised at 22K, am I definitely overpaying or is this extremely subjective?  Any thoughts would be appreciated.

Shane Wilson · Answer

I would buy with cash and refi in a year for 75% of appraised value from a local bank assuming you cashflow correctly.
            
            I have found that with the appraisals for the larger banks they appraisers come in lower since their client is the big bank and their goal is to make them happy and to protect them.
            
            With the local banks as long as the appraiser is respected they pretty much let me use who I like but as was previously said its all about building relationships with those banks.

Michael Rossi · Answer

Dave,

If the numbers look good (cash flow) and YOU are sure that the market value is considerably higher than you are paying, then I would just pay cash.  After you rehab it and get it filled with good tenants, you can always refi to get your money back, or use the equity in this property as collateral for your next deal.

It could be that some saavy investor bought a couple of similar buildings recently and the appraiser is using these low comps.  I've had that happen to me in the past.  I bought a couple of apartment buildings DIRT CHEAP and then the appraiser used my purchases as comps on my new purchase.  IDIOTS!

Good Luck,

Mike

Robert Mack · Answer

Dave,

Have you tried going to your local community bank?  I just recently started a relationship with mine and am speaking with the President of the bank, the guy who makes all the decisions.  
They might be more willing to give you a loan on a local property.

Ana Hyler · Answer

All of my properties were purchased with loans from a local (community) bank. It is trully a relationship based loan...I mean, once they know you and start trusting your investment decisions, it gets a lot easier...like Robert said...you can talk to the people that make the decisions. Good luck !

Diane Menke · Answer

I have had appraisors work with me inthe past, helping me hit my loan goals. These were folks I had history with. I was present at the meetings and we discussed what I wanted to do. They knew my lenders and mortgage bankers who were local.

I never feel confident that the appraisor I don't know is going to do anything at all to benefit me.

I never feel confident about a large faceless lender working with me.

Best
Diane Menke

Lynn Z · Answer

I had a licensed appraiser from BOA do my newly renovated house and he came in extremly low.  He came 3 hours late, I left him in the house, he saw the new kitchen, bath, roof, windows and came up with about $10,000 more than I paid for the house. I'd put $75,000 in it.  That appraisal lowered my LTV and my HELOC offer went from 92,000 to 64,000 at prime plus 1.99%.
I got the appraisal out of Florida - took me 60 days after the closing.  It was that style of appraisal - AVR or ARV generated by computer.  He didn't even measure I don't think.  My loan request was low - $115000 but I plan to use that low appraisal against my extremey high property tax assessment of $258000 which was done 6 months later by local county officials.  It's still an appraisal.   Will it work?

Nick J. · Answer

I agree with Jon,

I believe the term for appraisals are: Subjective opinions.

I'm just surprised there are still appraisers in the world today, I thought they were an object you would see in a historical museum.

Jon Holdman · Answer

Bill Bronchick runs our REIA, and one of his saying is "an appraisal is a piece of ... paper".  An appraisal picks three or four comps, adjusts the values, and determines a value.  In a few cases, it may be hard to find three nearby, recent, similar sales.  But usually, the appraiser has a choice of multiple comps.  The right or wrong choice can make a difference.

What do YOU think?  I assume you know your area.  Are there other comps that would give a higher value?  I think banks are gun shy right now, and want to be super conservative on their values.

Could be a bargaining point with the seller.  Maybe to at least get them to replace the other half of the room.