Appraisal issues on house I am flipping

[Luis A.]

Ok, so for the first time I have to deal with one of my flips not appraising for the sales price. I gave the appraiser a list of comparable recently sold, a list of repairs and before pictures of the condition of the house. I even provided a previous appraisal that had been done in November 2010 that came in at $112k.

I am selling the house for $100k and currently have a contract for that amount. The appraisal came in at $95k.

I am trying to figure out what I can do to fight this appraisal. First thing I want to do is to talk to the appraiser to make sure he got all his facts right and figure out why he came up with that amount. Second, If I recall right I might be able to request another appraisal?? I know I might have to pay for it but I am confident that a second appraisal would come in significantly higher.

Any other ideas what I might be able to do to fight this?

[Ryan Pyle]

I just got hammered on one. Sale price was $99.9k. Buyer was going FHA and I owned the property less than 6 months so we needed 2 appraisals. The first appraisal came in fine. The second came in at $93k. I tried to appeal but the appraiser said the neighborhood was a declining market so he had to use comps from the last 90 days. Well, the last 90 days are January, February and March. Not many sales to choose from. So, I'm stuck with $93k. We close on Friday. The other propblem is I just listed another house 2 blocks over for $109.9k. Do ya think my $93k comp might make this next appraisal kind of difficult?!

This is the third time this has happened to me in the last 12 months. My total loss from bad appraisals in 12 months is $22k.

The hard part about the '3 months comps' rule is that most of my flips take 3 months to rehab and get under contract so I have no idea what my comps are going to be ahead of time.

Sorry for the rant. Had to get it out to people who feel my pain.

[J Scott]

Originally posted by Ryan Pyle:

I just got hammered on one. Sale price was $99.9k. Buyer was going FHA and I owned the property less than 6 months so we needed 2 appraisals. The first appraisal came in
fine. The second came in at $93k.

Did you give the second appraiser a copy of the first appraisal? I always do this, and the second appraisal nearly always comes in within $1-2K of the first. There are a couple reasons for this (I'm guessing):

1. The second appraiser knows that the first appraisal has already been signed off by the appraiser (they don't get called until the first is signed off), so they know that the info in the first appraisal is safe to copy;

2. The second appraiser isn't going to want the appraised value to deviate too far from the first appraisal, as that will call both into question, and he runs the risk of his being considered "off the mark."

3. Using the same comps (or some of the same comps) as the first appraiser makes the job a good bit faster and easier.

While I certainly don't know that this is what's going through the appraiser's mind, the fact that my second appraisals nearly always come in very close to the first indicates to me that it is...

As an example, I had a house a few months ago where the first appraiser used a comp that was 2.5 miles away to get the value to come in at the contract price (there were certainly decent comps that were closer, but they were much lower value and wouldn't have allowed the appraisal to come in at contract price). In other words, it was a bad comp, but it helped me tremendously.

The second appraiser used the exact comp that was 2.5 miles away. There is very little chance that both appraisers would have come up with and chosen to use, the same bad comp independently.

[Will Barnard]

The link Jason provided should be read by all who flip or sell property.
Although there was one contrarian, I believe that it was proven wrong by many examples of experience from several big players.

As I stated in that thread, this business is all about relationships and not just long term ones, but quick one day stints too! Assisting the appraiser and getting him/her to like you is certainly a step in the right direction.

[Luis A.]

Ok I got the appraisal now. :shoot: Here are the comps:

My house: Listed at $100k, 4bed/2.5 bath, full unfinished basement, new HVAC, new kitchen, all appliances included

Comp 1: Sold for $93k on 1/5/11, 3bed/2.5bath, no basement, foreclosure

Comp 2: Sold for $76k on 1/18/11, 3 bed/2.5 bath, no basement, foreclosure

Comp 3: Sold for $108k on 1/26/11, 3 bed/2.5bath, full basement

Comp 4: Sold for $98k on 11/18/10, 3bed/2.5 bath, no basement

The first thing I noticed is that he stayed in the same subdivision he did not go out. Had he gone out of the subdivision and within a mile he would have found comparables in the $100k+ range.

Second, all the comparables except one are 3bed/2 bath no basement. Mine is a 4/2 full basement (unfinished) with new HVAC, entire new kitchen and a bunch of other improvements.

I know what everyone is saying, that $5k loss is not that bad but it just bugs me that there really are comparables better than the ones he used.

I like Aarons suggestions to go to the lender and start a dispute there. I don't think trying to get the buyer to fork the difference is a viable option.

What do you all think?

[Luis A.]

Originally posted by Roger Giansante:

Your best option would be to make sure the appraiser had observed all improvements. You will never get them to change by talking with them. Not in todays world.
But if the many upgrades and rehab were not detailed they may have missed them. Example: New HVAC system. If appraiser doesn't know they cannot use. Not full proof by any means but an angle that is non confrontational and actually helps the appraiser provide a more reliable product for the lender....

I have had 50/50 success with appraisers but its a headache and slow either way.
If they change anything they look incompetent and they don't like to do that. If they wer uninformed of something that affects value then you may have an option.

Roger I totally agree with your suggestions. I did meet with him, I gave him a list of comps., I gave him a list of all the repairs I made to the house, gave him pictures of the house before and talked to him.

I understand it is an uphill battle now...

[Ophelia Nicholson]

Firstly appraiser shouldn't reallly be using foreclosure/distressed sales comps if there are others to consider but I can see them using the comps in the same subdivision instead of going outside of the subdivision.
From your list the appraiser should have made adjustments for the following.
Comp 1- Adjustment for the distressed sale, The lack of one additional bedroom,lack of basement, condition of the house.
Comp 2- Same as comp 1
Comp 3- Should be a closer comp to your house- except the basement- Some adjustment if the other one is finished and yours is not.
Comp 4- See comp 1(remove the adjustment for distressed sale) add adjustment for time since that comp is right about 6 months old.
What was the condition of the other houses compared to your? Is your 4th bedroom above grade? It seems almost like it wasn't considered. My email is below if you want to send me the appraisal to review.

[Bill Gulley]

I agree with what Ophelia said (and most of what Jason and Will have had to say). Comp 2 is too low to begin with as it exceeds the adjustment limitations to begin with. Iwould argue that a distreesed sale is not a sales value that can be used, again by definition and requirements it's not applicable.

It may be too that comps were hard to find and that's why the appraiser had to use them, don't know.

Another thing that has not been touched on here is that when you fight an appraisal what you are really doing is questioning the professionalism of the appraiser. While some are receptive to making an adjustment it can be difficult to ask an appraiser to admit they made a mistake. Think about that part of it.

As to using in-house appraisers, a loan officer or broker may well do a little puffing or marketing saying they are on top of it. In reality, assignments of in-hosue appariser(s) have to fall under the concept of dual control within the bank. The loan officer will not assign the appraisal, someone above his "rank" or outside his department will do that. It's a matter of reducing any influence over the app. by the loan officer/broker.

FHAs will follow the property as mentioned and if the lender is not funding at the table, the appraiser will likely be assigned by the mortgage banker that the loan was registered with, not the broker.

When any appraisal is assigned, the very first question the appraiser asks is what is the contract price. They can not do any appraisal without the contract price as it sets the range to begin with comps. I have not checked appraisal requirements lately, but an appraiser won't start work in a sale transaction without the contract price.

As to a seller trying to get adjustments made, the seller is probably the last one who is most likely going to be successful in getting an upward adjustment. Motivation is obvious. The best person to make the case is the loan officer/broker. And remember, now we have laws restricting attempts to influence, so they will be a little gun shy, but they are still in the best position to do so.

In this example, I would "fight" to have comp 2 taken off and replaced with another comp if there is one. I think, just from looking your sale price of 100K was very reasonable.

You should probably follow the advice given above, take it or leave it and move on. It's nice to have another 5K, but selling at 95% ofyour asking price is not a sin and if you can't make money at 95%, your deal was to tight to begin with.

One last tid bit. If a buyer is agreeable and they have any other asset, like a car or boat or even coin collection, you can carry make another note with the borrower figuring in that payment as a debt if the ratios will be OK. Just a 1,000 at 200 a month, if they can really pay it, for 5 months will not be considered in the ratios as it will be fully paid within 6 months! If you suggest anything like this it MUST disclosed, entered on the HUD-1 as an amount paid out of closing.

Lastly, I'd suggest you take up Ophelia's offer.

[Jon Holdman]

You've made a mistake in thinking the comps outside your subdivision would be used. If there are comps in the same subdivision an appraiser will use those. If there's nothing in the subdivision, an appraiser might look further afield. But if comps are available, in the subdivision, those are the ones that will be used.

By "foreclosure" do you mean REO? Do you know anything about the condition of those two comps? If the second one was trashed, it should have been adjusted upward significantly. OTOH, if it sold three months ago and wasn't fixed and flipped and someone's living there now, its a reasonable comp. Just because it was sold as a REO doesn't exclude if from being a good comp.

You listed the sales prices, what about the adjusted prices? All have fewer bedrooms, so there should have been an adjustment upwards for the extra bedroom and space. I'm assuming your house is comparable larger than the others. If its the same size, just cut into more, smaller bedrooms, then there may not be much adjustment.

Are these really the worst comps? You should have a complete listing of the possible comps. If there are six more REOS, or even a couple, at even lower prices, the consider yourself lucky for the appraiser not having picked even lower ones.

You really MUST be very, very conservative when estimating sales price. During the boom you could count on an appraiser to pick the very highest comps. Not the case right now. You must know all the properties an appraiser might pick and assume he or she will use the very bottom comps.

[Bill Gulley]

Mo. Nv. Il and Md have either passed laws or they are still in legislation that will require that foreclosure sale are to be ommitted from any real estate appriasal, according to Appraisal Insight, an appraisal site for appraisers. Other states are consider similar legislation.

There has been considerable squak about using any distressed sale that does not meet the deinition of "Market Value". The main problem is that an REO is or could be trashedand in need of repair. The market available to sell these properties is limited, the GENERAL PUBLIC does not consider such properties and the market is limited to investors, contractors and other who are capable of repairs.

Another aspect is that the foreclosure is sold with title restrictions and again violates the definition of "market value" by not providing good and mechantable title at the TIME OF SETTLEMENT. If a buyer is required to hold a property for 90 days after settlement, such restriction imeads the new owner's ability to convey and such has an economic impact on the buyer. To off set such an impact it is therefore reasonable to assume that a buyer will compensate for this restriction in the price for the carrying expenses involved...this is a measurable and real expense.

Foreclosures are sold with limited title guarantees, they are not conveyed with a General Warranty Deed but with a Special Warranty Deed, limiting the liability of the seller as to recourse from the transaction. This is not a conveyance that meets the requirement to convey by a good deed, again meeting the definition of market value.

Another aspect is that foreclosured properties are, by definition, a distressed sale. Due to condition, they have a limited market and they are often marketed for cash only.

Appraisers have been pressed hard to include foreclosures by banks and secondary markets to obtain a very conservative approach to value. However, now, even Fannie and Freddie are coming down on the side of ommiting these. Govt. guranateed loans have no requirement to use them. So much of this comes from the banks to arrive at a conservative value.

In the above example, comp 2 is almost at 25% less and appraisal rules limit adjustments across the comp not to exceed 10%, so the appraiser really had to work hard to bring the adjustments upon comp 2 which probably forced the 5% reduction from the sale price.

It's a bad comp.

[Justin S.]

Losing 5K is a big deal for me. If you reinvest your profits, that 5K can quickly turn into something much greater by the end of the year. Having said that, you best option is probably to just sell it for less.

[Bill Gulley]

You know, saying that you "lost" 5K because you didn't get your expected asking price that was agreed to by an unspohisticated buyer is not really loosing 5K! I'm not saying that your property is worth 100K, but it's not unless it can actually sell at that price. If your buyer didn't need a loan, it may have been a done deal, but since you contracted with someone who needed an FHA loan, it will be determined as the accepted collateral value for the loan. That's the way it is in real estate. Simply having an agreement with someone does not mean it's a closed deal at that price unless it's a cash sale.

In this case, I would see if they would replace comp 2 and readjust, but if the appraiser is too embarrased due to his professional ego, I'd dump it and move on.

Like Justin said, probably your best option at this time.

[Stan Jackson]

qk,

The one thing I have not seen posted yet, is in my experience appraiser will not adjust for room count AND living area at the same time. Does your report show adjustment for living area?

I curious that in the subjects' subdivsion, there several 3/2's to consider, but no 4 bedroom comps. Is the 4th bedroom a true bedroom or was it converted into a 4th bedroom? The appraiser may have seen the 4th bedroom as a conversion and simply adjusted for living area.

Also, it has been my experience an extra bedroom would result in extra living area, approximately 200+SF. So, with that said, the 3/2's would not be comparable because the adjustment for living area would exceed FHA tolerance levels.

[Aaron McGinnis]

Luis,

Give us the adjusted values... but I can tell you already that your problem is comp #2. Get that one dropped, or better, replaced, and this problem will go away.
(Feel free to send me the appraisal and I'll take a look... but I'm certain that comp #2 is the problem)

One way to fix this is to call the appraiser and tell him something like, "Hey, yeah, I saw that house before it was sold... man, that place was a total wreck. It is by no means a fair comparable."

Dovetail that statement with, "The house over at 123 Main St. is a much better comp. I know it's outside the neighborhood but it is in a very comparable neighborhood nearby and the house was very close to the subject here."

My guess is that the rest of your comps adjust to meet your sale price, but once the 4 comps are averaged out you're getting dragged down by #2.

This is actually not that huge of a deal. One comp throwing things off is much easier to deal with than having every comp on the list needing to be erased and for the appraiser to start over.

MOST LIKELY what happened here is that the appraiser popped open redlink (Or is it redlist? redbook? Whatever it is that they use) and did a quick neighborhood study and picked the 4 most recent sales, then plugged and chugged without thinking too much harder about it.

Give him the data, explain the error in logic, and you should be golden.

But... do make sure that comp #2 is the problem by reviewing the rest of the appraisal.

[Luis A.]

Guys and gals, thanks so much for the overwhelming helpful response :D

I could go into more detail into the appraisal. Yes there were adjustments made to the comps I posted. Sorry for not giving out all the details. The adjustmens bring the average price awfully close to $100 k except for that one house at $76k.

Like Aaron says, my best bet would be to try and take that one out of the report which is exactly what I am trying to do.

I also spoke to the appraiser, he was pretty cool about it and actually explained his rationale pretty convincingly. One of the reasons he did not go out of the neighborhood is because of all the recent comps. there are in the neighborhood so he did not have any reason to go out.

My agent and I are working with the buyers lender to try and get something changed. However the neighborhood has currently quite a few active foreclosures on the market that are even lower so this makes it an even harder battle.

Will certainly update you all how this turn out. Thanks again for the awesome help.

[Account Closed]

i know it sucks, but i'd just take the 5k hit..last thing you want is first time buyers having remorse, thinking they're 'overpaying' bc they don't understand the intricasies of an appraisal...if they back out, you're stuck with more foreclosures as comps in the next month or so, as you'ved stated..i'd take the hit, turn my money and reinvest as fast as possible..nevertheless, good story to follow, and good luck :)

[Will Barnard]

The only reason an appraiser should or would go outside of a subdivision is IF there were not enough sold comps to use inside the subdivision. In this case, there are enough so it was a mistake on your part to think that the appraiser would use anything else.

That said, had you been armed with these comps and photos and history of each of them to support upwards adjustments, you may have been better served (although this is now hindsight).

Unless you are successful at getting that one low comp tossed out or properly adjusted, you are stuck with taking the $5k hit at this point. As stated before, $5k lesson learned.

[Luis A.]

Originally posted by Will Barnard:

.

That said, had you been armed with these comps and photos and history of each of them to support upwards adjustments, you may have been better served (although this is now hindsight).

I was and I provided it all to him before the appraisal.

[Jake Powell]

I had to sign up to respond to this thread.
1. Do not go through the appraisal line by line. Much of the appraisal is subjective, an opinion. The appraiser has his opinion which is based on (hopefully) on years of experience.
2. Do not give comps which are from a different subdivision IF there is sufficient sales and listings in the immediate subdivision. Comps from a different subdivision are not a good sign. If apprasier over looks comps from subdivision he could face disciplanry actions from state or FHA.
3. Appraiser have many guidelines to follow, try not to question adjustments. The required guidelines seem to change for the worse every day.

FYI, If your neighborhood is fueled by bank and REO comps(which is easy for anyone to figure out), those will be the comps. Dont think because a few states are trying to have a bill disallowing bank and REO comps that this means your appraisal should not contain bank/REO comps. A state law will have little power over a federally regulated mortgage transaction. IE look at the up hill battle MMJ dispensaries have.

Things to do.
1. MLS is often wrong, check comps against MLS printouts, check big items, SF, garage 1-2-3, condition,
concessions, view. If a discrepancy exists, point it out, don't throw out what you think the $ adjustment warrants.

2. Many times comps expire or are withdrawn which have actually sold. If you have MLS access comb through the high expireds and withdrawns for this situation-only takes one.

Trust me fighting with the appraiser is an up hill battle, not because of the appraiser's ego but becuase the UW already has seen report, buyers side has possibly seen report, FHA hates to see an increase.

In the future; price the property based on current sales/listings, try not to meet appraiser at property, dont supply comps unless asked, HVCC help squash this (now called AIR), supply a list of upgrades(perhaps same list that should be on site), tell appraiser what permits were pulled, make sure water/utilities are on, make sure all remodeling work is finished.
The appraisal matters more on what has sold in the past 3 months and is currently listed and under contract more than the condition of the subject. Of course you feel that your flip is better than all the others, and maybe it is,,but it has to appraise. You make you money when you buy the flip and than make it again on volume(the next flip). Dont let one sale create a battle between you, the UW, the Realtors, the appraiser etc. If your in this business for the long haul you need to build respect as a good flipper. I have many deals I decline because I know there will be a battle since the property is over priced and Im not going to be the bearer of bad news.
Good Luck

[Mathew A.]

It's nice to hear from an appraiser. Thanks, Jake, for signing up.

[Bill Gulley]

Welcome Jack, it's great to get a practicing appraiser on here. I appraised residential and commercil as well and did review appraisals, but retired now.

As to the state law and FHA or VA loans on an REO. The state law will be complied with fully. Bank regulators will insist on compliance and it won't really matter what a loan committee thinks for a violation of state or federal law.

To my knowledge, there are no loan underwriting requirements that contradict any state or federal law, and there won't be, since state law trumps underwriting guidelines.

Since government loans are usually sold with servicing retained or released the effects of various loan risks with a portfolio lender will not be as important, even if the bank is fueling the area.

I have never met an appraiser who was not opinionated, including myself (lol), and using a comp outside a subdivision is a subjective decission, as it depends on on several factors, but generally I agree that in a mature subdivision they should come from within.

You made a very good point concerning the uphill battle that can be had if anyone begins to argue with an appraiser, as no one likes to be contradicted, especially from someone outside their area of expertise.

In a perfect world there would be a property three doors down with the same floor plan, closed last week another like property four doors down the other direction and a third behind the subject on another street in the same mature subdivision. That doesn't happen often, in fact never that I have seen, since we don't live in that perfect world. There are comprable subdivisions, at least in my area. Where a home in a comprable subdivision that is more similar to the subject would be better comp than one not as similar inside the subject subdivision. It's a subjective call.

[J Scott]

Originally posted by Financexaminer:

You made a very good point concerning the uphill battle that can be had if anyone begins to argue with an appraiser, as no one likes to be contradicted, especially from someone outside their area of expertise.

Anyone who has read my posts on the topic knows that I'm a big proponent of putting together as much data as possible and meeting the appraiser at the property to personally speak with him, give him the data, build a relationship and answer any questions. And in my experience, I've never met an appraiser who has seemed bothered by this, and I've only had one appraisal come in low after doing this, so empirically, it works for me.

That said, I completely agree with Jack and Bill -- if the appraisal does come in low, arguing with the appraiser (or even just calling to speak with him about it) is unlikely to get you anywhere, and could just make the situation even more unfixable.

If you get a low appraisal and you think you can justify a higher value, work directly through the broker/lender/underwriter to try to get it changed. Going around the UW will lead to questions, especially in today's world of HVCC where the UW sees the appraisal long before you will.

[Luis A.]

Originally posted by J Scott:

And in my experience, I've never met an appraiser who has seemed bothered by this...

That has also been my experience. They are usually very receptive and welcome the information because it makes their appraisal easier. They still verify the information I give them but since they find out it's true then they are glad to use it.

I will confirm that it is an uphill battle. Because the comps. in the neighborhood are so weak I have no choice but to accept the appraisal. Even though I have had another appraiser review the appraisal and disagree with the adjustments made the regulations are in the appraisers favor and I am alone in my corner :cry:

However, appraisal aside this deal is turning into quite the soap opera and whether it's going to happen or not is anyones guess right now. But that is another thread...

[Jake Powell]

http://portal.hud.gov/hudportal/documents/huddoc?id=201104aprnewsletter.pdf

page 4

Failure to Perform an Accurate Appraisal Report and Select Suitable Comparable Sales
'''''''
In Case No. xxx-xxxxxxxm .......Comparable Sale No. 3 is located over 1 mile from subject and no support or explanation is provided as to why other equally similar comparable sales in closer proximity to the subject were not selected. The Santa Ana HOC issued an education sanction against the appraiser, requiring completion of 29 hours of continuing education (15 hours of USPAP, 7 hours in the preparation of FHA appraisals and 7 hours of sales comparison analysis). The appraiser failed to complete the continuing education hours within the allotted time period and the Homeownership Center is proposing to remove the appraiser from the Roster for a period of one year. Final disposition on this case is pending.''''''

They are watching us.
I friend of mine does post closing FHA reviews and they were told to crack down and let nothing slide..

[Jake Powell]

Bills to Prohibit Distressed Sales as Comparables Die in 4 States
Proposed legislation in Illinois, Maryland, Missouri and Nevada seeking to prohibit use of foreclosures and short sales as comparables in developing opinions of residential real estate value appears to have failed. Two bills missed procedural deadlines, one has been amended and the other was withdrawn by its sponsor. > FULL STORY
See AI(Appraisal Institute) News

[Bill Gulley]

Wouldn't doubt that at all, given the nature of the banking lobby. Bottom line, a sale that is restricted in the market and does not provide fully merchantable title does not meet the definition required as "Market Value"!

Anyone can justify till the cows come home, when they seel them without other restrictions generally found in the market and issue good title with a General Warranty Deed, my opinion would change. I and I'm sure others won't pay top dollar for what they sell.

Really, I don't doubt that the laws didn't pass, but FDIC has weighed in as well. Later