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Updated over 13 years ago, 05/10/2011
Appraisal issues on house I am flipping
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?
Have you seen a copy of the appraisal? If not, get a copy from the broker or directly from the buyer. Read through it, see if there are any glaring errors or omissions, and if so, you have two options (at least in my experience):
1. If you built a good relationship with the appraiser when you met him, you may be able to call him directly to ask questions. That said, oftentimes appraisers don't like getting calls AFTER the appraisal is completed, as technically they really can't do anything about it unless their is an appeal by the lender;
2. Let the broker know that there are issues with the appraisal, and ask him to formally submit the new information to the appraiser for review. With FHA, at least, there is a specific process for appealing appraisals and submitting new information.
If it's FHA, you don't have too many other options. A new appraisal won't supersede the original appraisal, unless the lender/underwriter believes that the original is somehow flawed, which will be a hard argument to make just because the value came in low.
Your best option is probably to appeal with any information you can find that is better than what is in the appraisal and then just drop the sale price to whatever the appraisal price comes in at.
Did you see the actual appraisal?
From the buyer's perspective, they are more comfortable with a lower number, they might raise the same question you just did if you'll be able to re-appraise.
Negotiate with the buyer and meet in the middle - still better than them walking away
Well your November 2010 appraisal is old and not valid anymore so what it was then means nothing. IF your selling the home for $100K and it came back in at $95K, then lower your price $5K and close the deal. Dont waste your time trying to fight $5K. I actually think your lucky it did not come in lower. Move on and close the deal.
- Curt Davis
Originally posted by Curt Davis:
Curt, I know that but how can the appraiser justify a 15% decrease in value in 4 months! I am just wanting to use that as part of my defense.
J, i requested a copy and I am waiting for it before I call the appraiser. I had talked to the appraiser before and clarified several things for him before hand. I had also found sales as recent as March for $110k+ of similar properties, not in the same subdivision but less than a mile away. I am waiting on the appraisal to see what he used for comps.
Originally posted by J Scott:
You are confusing me here, if you are going to drop the price anyway what is the use of appealing?
Originally posted by qkjones:
Curt, I know that but how can the appraiser justify a 15% decrease in value in 4 months! I am just wanting to use that as part of my defense.
I certainly wouldn't use that as a defense, as it will come off as very amateurish. It's very possible that the comps used in the November appraisal were on the cusp of being too old, and now -- 5 months later -- they are certainly too old to be used.
It's also possible that one or two of those older comps was propping up the value of your property, and with them now gone, the value has dropped considerably. 15% is really not that big of a drop if one or two of the better comps is now too old to use.
That said, get the appraisal and take a look for yourself. Hopefully, the appraiser missed a key comp or made a bad adjustment, and an appeal will help you out.
I had one a couple months ago where the appraiser thought the contract price was $8K less than what it was (almost 10% less than it was), and it was clear the appraiser just went so far as to get the value to where he though the contract price was (which in actuality was $8K too low).
Once he realized that he screwed up on the contract price, he "magically" was able to justify a much higher value with a new comp and some additional adjustments.
Was it fully ethical on his part? Probably not, but by the same token, he knew that his original appraised value was probably lower than it should have been, and he was just attempting to come in around the contract price as opposed to much above it.
Appraisal is just as much an art as a science, and appraisers get pressure from all sides to do the right thing...which unfortunately often results in them not doing the right thing unintentionally.
They've got a tough job these days...
Sorry, I meant to imply that you appeal first, and then accept whatever comes back after the appeal and lower the price to that (if it doesn't come back at full price).
I have an appraisal today that's going to be REALLY tough...so I feel your pain...
I fought our recent appraisal and unfortunately did not get anywhere. Ours originally came in at one price and then the "lender" challenged it and got it lowered a few days before closing (3 to be exact). I asked for copies of both appraisals and the reasoning for lowering it was unbelievable. I challenged and challenged and they would not change it back. I emailed and called about a laundry list of questions and no one ever responded other than they are conducting a "field review", which does not mean anything because they will take the lower price anyways.
Basically what I learned is that:
1. The people who need to present the issues to the appraiser do not really care what you think (the lender and buyer agent), so it is very hard to change it. Its generally more work for them.
2. The time it takes to get it changed (if you can) will result in additional holding costs which may or may not be worth it.
3. The best way is to have them change lenders, which may again not be worth the time and effort.
Justin -
Wow, that sucks. Clearly, the lender wanted the deal, but chose to wait until 3 days before closing to make it difficult for the buyer or the seller to back out -- essentially extorting you into accepting a worse deal.
The worst part is that -- if this was an FHA loan with an FHA contract addendum -- there is probably little you could have done to prevent this. Those FHA exhibits basically say that if the appraisal comes in low for any reason or at any time (even after an appraisal contingency is over), the buyer can back out if the seller doesn't lower the price.
Personally, in this situation, I would have spited myself and told the buyer and the buyer's broker -- fix it because I'm not lowering the price. And see what happens.
The one lesson here that's worth mentioning (not that this would have changed anything) is that most people assume that the appraisal is done once it's submitted and the broker says, "The appraisal came back and the value was above the contract price."
In reality, until the underwriter signs off on the appraisal (which should only take a day or two with a good underwriter), anything can happen with the appraisal.
Another reason to want to use a lender/broker you're familiar with...
Sorry about that situation...that sucks!
Here are my thoughts from previous experiences:
$5k is very close so rather than spending so much energy and time, try going back to the buyer and see if they are willing to meet you in the middle, they bring an extra $2500 cash to the table and you eat the other; OR just eat it all and move on.
Your only other real option is to switch lenders and start the process over. If you did your exit correctly, then you had your buyer agree to double app with your lender and as such, you do not have to start from scratch. If you did not do this, then you just learned something new and it cost you $5k for that lesson.
Always have your buyers at minimum, double app with your lender. In the case of Jason Scott and in his neck of the woods, he is able to have his buyers use his lender and with that extra control, often times, the appraiser comes in at value (contract price).
One more thing, if you are going to contemplate starting over, you must weigh the cost of extra hold time + new apprailsal costs and possible new other loan fees you will have to pay vs. trying to recoupe the $5k.
The decision is clear to me.
Originally posted by J Scott:
That said, get the appraisal and take a look for yourself. Hopefully, the appraiser missed a key comp or made a bad adjustment, and an appeal will help you out.
Right now I am just waiting to get my hands on the appraisal just to make sure he got the facts right and there is no obvious mistake.
Will, both of these options are in the table. I just want to check the appraisal first.
I have also consider them switching lenders, since they did apply with my lender (right J :wink: ) but this is an FHA loan so that appraisal stays tied to the house for 6 months regardless of whether they switch lenders or not. I am not sure what impact that would have if they switched lenders but that is what they call an FHA case number.
The last factor here is that this causes panic in a buyers mind. They already are using government assistance for down payment so I am not sure how they will handle this appraisal.
Thanks to all for the valuable feedback. I will update you soon.
Originally posted by qkjones:
Why didn't you convince them to go with Alan!?!?
The nice thing about Alan is that for FHA, the bank he uses house in-house appraisers, and he'll get notified by the appraiser if there is an issue BEFORE the appraiser will submit it to the underwriter. I've yet to miss an appraisal when my buyers use Alan as their broker...
Unfortunately, like you said, with FHA the appraisal follows the house for 6 months...so switching lenders at this point really won't help...
Firstly I don't know that I would want to fight 5k. This is a flip, the goal is to get in and get out as quickly as possible. 5k matters but in the grand scheme of things you can move on to the next one.
Next issure- FHA appraisal is good for 120 days. If you get a second appraisal and the value comes in lower- You have to go with the lower value, If you get one and the value is higher- Guess what! You have to go with the lower value.
Anyway you can request an appraisal reconsideration if you decide to fight this one- You get a copy of the appraisal and you go line by line- If you have a copy I'll help you out. You see the appraisers adjustments and you say I don't agree with x and y. You also check the comps the appraiser uses and if you have better comps then you give them to the appraiser for him to consider whether he can use them or not. I just had one done today - Unfortunately no raise in value but this one was 60k less than sales price.
Anyway if you have the appraisal you can tell the things he made adjustments/comps he used and asked him to consider others that may have closed in that time or ones that he overlooked.
Edit- If the appraisal you did in November was not an FHA appraisal that could account for your 15% variation- FHA appraisals are usually more conservative than regular conventional and tend to come in less or maybe you had stuff close that had a lower value. Comps that are too old for use. I could go on and on
I can answer this one, from my experience on my last sale. Unless you can somehow get the appraisal higher, you will have to sell for $5K less or lose this buyer. Because they are getting down payment assistance, they cannot bring money to the table. So, splitting the difference and having them bring in $2500, even if they actually do have it, is not an option.
You need to speak with the lender after you get a copy of the appraisal. Look for any basic mistakes.
If you don't see anything major, have another appraiser you know write a letter challenging the appraisal and providing additional comps for consideration. Do not send it to the appraiser directly, send it to the lender and make it their problem.
Like others have said... 5k isn't worth the trouble. See if the buyer can bring in additional funds, see if the agent will take a commission reduction and just deal with it.
I will be writing up a blog post, I had an appraisal come in 80,000 less then my sales price on a 208,000 sales price. I did a lot of crap to try to get it removed and fight it... After I officially close the property to another buyer I will be starting a lawsuit.
Originally posted by Steve L.:
I will be writing up a blog post, I had an appraisal come in 80,000 less then my sales price on a 208,000 sales price. I did a lot of crap to try to get it removed and fight it... After I officially close the property to another buyer I will be starting a lawsuit.
Wow, that's crazy.
Who specifically are you planning to sue?
Glad you got another buyer and are getting this closed!
Originally posted by J Scott:
Why didn't you convince them to go with Alan!?!?
The nice thing about Alan is that for FHA, the bank he uses house in-house appraisers, and he'll get notified by the appraiser if there is an issue BEFORE the appraiser will submit it to the underwriter. I've yet to miss an appraisal when my buyers use Alan as their broker...
Believe me it wasn't for lack of trying. I have now tried on 3 different buyers to get to use Alan and I am very surprised at the resistance. I have used incentives like lower earnest money, longer contingency periods, paying for the appraisal and nothing...
In two of the instances the buyer claims they had a personal relationship with the lender and did not want to consider another lender.
I absolutely agree that if buyer was using my lender it would be a different story but nothing I can do about it now. :cry:
J Scott would you be willing to share you mortgage broker? I am currently investing in Cherokee county and looking for an FHA lender for this area.
Originally posted by Jon Holdman:
I can answer this one, from my experience on my last sale. Unless you can somehow get the appraisal higher, you will have to sell for $5K less or lose this buyer. Because they are getting down payment assistance, they cannot bring money to the table. So, splitting the difference and having them bring in $2500, even if they actually do have it, is not an option.
Jon,
Was the buyer allow to have a gift in that scenario?
Stan
Originally posted by Atlanta Investor:
Certainly, shoot me an email (linked from my blog) or a PM here on BP...
#4 Contractors Contributor
- Contractor
- Atlanta, GA
First of all - call me and let's go get some lunch sometime!
Second, you're speaking my language. I haven't had an appraisal yet that I haven't had to fight tooth and nail.
The broker needs to challenge the appraisal and request a 2nd evaluation. Because this is an FHA loan, moving to another broker won't help. Basically, this appraisal has to be right or you're really SOL.
Have you agent draw up a very professional looking BPO. Don't skimp on the written details, but don't give the appraiser a word-wall that he won't have time to process.
Give him the BPO and also give him a cost breakdown for the rehab. He's already going to assign a rehab $$ number for himself, and it's probably way too low. So make his life easy and give him the number.
The BPO is, in my experience, very important. Lay it out like you would for a standard bank BPO and make it really easy to follow. You're basically doing his job for him.
Get in touch with him. If possible, of course, meet him at the second evaluation. Be very friendly and consider simply saying, "Look bro - the contract price is XXX,XXX and you're $5k low on the appraisal.
Don't ask him to come up, just let him know what the contract price is... most likely, he doesn't know unless someone has told him. Put a number in his head and let it fester.
If the rehab you have is permitted, pull down permits or lack thereof for the comps and use that as leverage. (I've made that argument with some success in the past)
Above all, don't beg, don't whine, and don't come off as desperate. (I know you won't, you're too good a negotiator for that)... simply state facts and back yourself up with a slew of facts and figures that simply cannot be argued with.
Of course, getting the mortgage broker on your side is a big deal...
Originally posted by Stan Jackson:
Jon,
Was the buyer allow to have a gift in that scenario?
Stan
No idea. It was not necessary in my case. The buyer was getting a 96.5% FHA loan, 3.5% down payment assistance from a county agency and my partner and I paid all their closing costs.
We had originally agreed to $172K for the price. But then they found sewer line problems and we eventually agreed to split the costs of the sewer like by making the price $172,500 and we would kick in $2,500 to the plumber. The appraisal came in at $172,000 and the appraiser would not budge. The buyer's were willing to just pay the $500 in cash, but were not allowed to because of the down payment assistance.
Qk,
It almost sounds like money is tightening up. The first sign is low appraisals.
It is important to meet with the appraiser when he first views the property and explain your price with your comps. If he is busy he will appreciate them. A little rapport goes a long way. If he had problems accessing the property he may accidently only find the low comps.
I know Luis is familiar with this, but for others interested in how to improve your chances of a good appraisal, this might be helpful:
http://www.biggerpockets.com/forums/312/topics/55307-controlling-your-appraisals
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.
Other item could be the market has changed. In FL a 15% drop over 4 months is realistic. But a completely rehab'd property may not be represented by a trashed short sale. That can always be an option when you see the appraisal. The net and gross adjustments for comps have to bracketed and not be very large. Maybe 10-15% or they are not true comps. If you can assist the appraiser in making a better product that may help but don't expect anything. For 5K you may have to deal with it.
If it was 10k plus and you were confident you could pay for a 2nd independenyt appraisal but lender may still use the lower depending on the AVM review.
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.
I didn't see the above link until after posting but great answer and information. Listening to what he says. Being present and trying to be professional and nice cannot hurt. Many appraisers will try to avoid that but others are good and listen to you and want that information. I require that breakdown and pics etc for my investors when doing sales so I can provide to the appraisers upfront. Great advice!