My flip house didn't meet appraisal - what are my options?

Question

I listed a flip at 250k, and accepted an offer at 250k with 5k to buyer at closing with additional repairs that were requested post inspection. The appraisal came in at 243k and includes required repairs. I have not seen the report yet to know the extent of repairs, and I do not have the appraisal report. I should have both shortly. This is an FHA loan.

I guess I could amend the contract to 243k with no money to buyer at closing, and only do the required repairs for appraisal. Or just cancel the contract. Do I have any other options? Can I request a second appraisal at my expense? We have comps to support our price.

Matt Williams · Answer

@Bill Hinshaw

There are a variety of things you can do in a situation like this:

1. Send the comps that you and your realtor have that you feel support the value.

2. Send a comprehensive list of the improvements and the costs to the appraiser. You want what you purchased the home for plus your improvements to come as close as possible to the sales price.

3. Bite the bullet and accept the offer with the minimal required repairs. (By the way, inspections are often a total joke. But if there are major things required, it could mean that you missed something you shouldn’t have. Something to be aware of on future projects.)

Lastly, I don’t think I would kill the deal with these buyers. First, you’re most likely going to run into these issues with another buyer. But more importantly, I have learned through many years of doing this.... take the offer you have. Killing a deal in hopes of getting a better offer when selling your properties rarely works out in the long run.

Nick C. · Answer

Appraisers are such an antiquated function of real estate. Buyer's agent works their tail off to find a buyer their dream house, seller's agent runs people in and our of seller's house, seller wants to sell, lender works their tail off to get the loan done - and then it goes to the desk of a randomly generated 3rd party whose opinion makes or breaks the deal. It's ridiculous.

Even worse, the FHA appraisal stays with your property for 4 months, so no other FHA buyer can purchase your house if they wanted to. And if you dispute the appraisal, guess who looks at it - the same appraiser! So the only way this number is going to change is if the appraiser admits they mailed it in the first time, they have 0 incentive to admit their mistake.

This is how many deals die, luckily you're not too far off and should figure something out. We've had appraisals come in 40k too low, after receiving multiple full price offers above asking price. Imagine the ego that guy had to think he was that much smarter than us (the seller), a dozen buyers, and a dozen buyer's agents.

Joseph ODonovan · Answer

@Bill Hinshaw Make this deal work, you're only a few grand off. Negotiate with buyer by meeting somewhere in the middle. What are your monthly holding costs ? If this buyer walks, you are back at square one. The credit markets are tightening up, buyers may be a bit leary today with the uncertainty facing the economy. I would not let that fish off the hook. Good luck.

Joe Cassandra · Answer

Yeah, do what Mark recommends.

Unfortunately, you don't seem to have a great selling agent.

A house listed for $250k and $5k in buyer credit is ultimately a $245k sale.

No appriaser is going to tank a sale by $2k.

Appraisers are lazy...if you give them comps and show your repairs, they'll usually fold.

Mark Freeman · Answer

@Bill Hinshaw

@Nick C. Nick gave great advice above. Take a conventional offer over FHA when possible, the  appraisals seem to come in easier.

Because of these kinds of situations, my agent started meeting the appraiser at the property with comps. to justify the price. (It is so much better to get it to come in at or above the sale price, than to try and fix it later). She tries to do it every time now and it really makes a difference. (She is great at building relationships and comes off as just trying to help, and most  appraisers appreciate it).

Lee Bell · Answer

Cost per SF is not a useful metric. It includes land, amenities, etc.

Russell Brazil · Answer

No, all appraisals do not have adjustments for minor differences in square footages. If your locale sells houses on a price per sq foot basis then they might. But if you are in a locale that does not use per square foot costs, then minor differences in square footage would have no impact on value.

Bill Hinshaw · Answer

@Russell Brazil The appraiser didn't specify a cost/sq ft. I'm doing that. I would assume all appraisals have some adjustment for size differences in the comps, right?

The appraiser basically said comp A is 170 sq ft smaller, so I'm going to adjust the price by $7000 to reflect the additional sq ft of the subject house. That math works out to $41/sq ft. That is an extremely low value, and it was consistent across all 3 comps (the range was $38 - $41). Where does that come from? Is that common knowledge?

My wife provided comps for houses in the immediate area that had been renovated, that matched the quality of materials in our house, and were of similar age. He only used 1 of them. Still, the comps used aren't really the issue. They should have worked if he had valued the additional sq ft of our house at an appropriate value.

Russell Brazil · Answer

We do not use cost per square foot in the midatlantic. (Althought they do in Massachusetts where I do some business)

You should always have a variety of comparable, those that are spot on, and those that are purposefully high, with acknowledgements of when you are going through the comps with the appraiser, that x property may be high.  That dialogue builds in trust,  It also gives the appraiser a higher dollar comp to adjust down from.  If they are going to be intent on adjusting down from a comp, you want it to be one priced high as opposed to spot on.

You also want to always be cautious with FHA, because the appraisal is going to stick with the property for months. There are also the required repairs that will come along with an FHA (as well as VA) appraisal.

My flip house didn't meet appraisal - what are my options?

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