Whacky appraisal logic on Cash Out refi?

Question

Hi all,

I'm doing a cash out refi, and the appraised value is "okay", but I think it's off by about 20k; which makes a huge difference in the cash out value. Essentially, there are 4 adjustments the appraiser is doing/not doing that seem very odd to me and it seems I have no power to get it corrected? My loan officer sent them for reconsideration, and the appraiser sent it back with no adjustments.

1) All the comps were half acre lots, while mine is a full acre - No adjustment, even though the land value in this area is 20-60k per acre.

2) One of the comps was a 2/1 with 2 dining rooms! (I actually looked it is a few years ago, it had a weird layout). This 2/1 sold for 80k less than the other comps(3/2s). The appraiser adjusted 5k for an extra bedroom and bathroom. This comp significantly dragged the appraisal down.

3) None of the comps had new windows, while I spent 10k upgrading my properties windows to new energy efficient ones.

4) Appraiser marked one of the comps as a 2dw when it was actually a 1dw, a several thousand dollar adjustment mistake.

It seems really odd to me that the appraiser can effectively ignore errors they've made, and refuse logical adjustments.

This is my first CashOut refi.

Andrew Postell · Answer

@Ryan G. very sorry that this happened.  Always stinks when the value doesn't come back what you were expecting it to come back at.

Would you mind if I shared some things here that might be useful to know about?  I'm asking....because these may not be the things you want to know...but these are the things you should know.  So I hope you don't mind.

A few things to know about appraisals:

• I know I can get more for this property if I sold it! - Yes, this better be true 100% of the time.  Especially right now.  This is because you will market the property.  You will have a great real estate agent promoting it on social media.  You'll have a flyer bragging about all the upgrades and talking about the neighborhood and ALL of the other things that come with selling a property.  And then when you have it under contract you have definitive proof what the fair market price is for this property - because you have a sales contract with that price!  So you'll show the contract to the appraiser. The appraiser now uses the comps to justify the value on the contract. So there still needs to be some comparables to justify it...but when you refinance....you have NONE of this.  None!  The only thing you can go by is the comparable sold properties - or "comps".  That's it.  Now this might be a little different if you are using a DSCR loan which might go on the income based appraisal of this property (which will have completely different terms and rates)...but it sounds like you are using a "comp" based appraisal for the loan.  The only thing we have to determine value - comps.  
• The Lake Front Property - How often do Lake Front Properties sell?  NEVER.  Maybe one per year?  Maybe.  There have been many lakes that don't have a single Lake Front property sell for an entire year.  Some lakes have gone years with not houses selling. So what happens when you are selling a Lake Front Property?  What are your comps?  Now, there might be comps that are a couple blocks OFF the lake....but those aren't comps to my property.  A Lake Front Property has value OVER a non-Lake Front property...but how much value?  This can be extraordinarily hard to say how much value because I have no comparable properties that have sold. Which means, I'm giving up a lot of control of my deal over to someone else's opinion - the appraiser's opinion. So if I'm selling my Lake Front Property I better be putting some protections in my contract to help me with this.  Appraisal waivers, etc.  Again, none of this occurs when I am refinancing...so that amazing view that I have?  It might not be so amazing to the appraiser.  If there's no comps that support it...I might be out on the value or have the value greatly diminished. 
• Over/Under Improving - one of the questions that we get here in Texas is "should I enclose the garage to get more square footage".  We get this question because in some neighborhoods it is common to enclose a garage.  But in other neighborhoods the garage is the more important item.  So in the neighborhoods where enclosing the garage is normal...I will need to budget in the cost of enclosing the garage but also get to add the value of the square footage.  In the neighborhoods where they don't enclose the garage, I can actually HURT my value by enclosing the garage.  Or if I don't HURT the value, I get no added value.  We can substitute this garage scenario for a Pool....granite countertops....metal roofs....just about anything really.  I want to pay attention to my neighborhood and not OVER improve my property.  But I also cannot UNDER improve my property either.  Knowing what is normal in my neighborhood will help me determine the proper value for it and budget the appropriate rehab too.
• What do my comps show? - This is what I need to support the value of my home - comps.  Keep in mind it is your right to "contest" your appraisal value. How do we contest the value?  We show 3-5 properties that are more comparable to mine.  We give that to our lender and then the lender contests the appraisal with the appraiser.  The appraiser is scored officially on these things.  Really!  There is a system that shows how they do and lenders see it and determine if they want to keep using them.  So they need to provide justification of why they used "this" or "that"...and if those reasons aren't good enough, you get to order a new appraisal with that lender.  Contesting the appraisal free to do so there's no downside to doing it. Here's some hints to what might occur with your "appraisal reconsideration":Windows - how many comps don't have windows?  None, right?  So how many of those comps will have energy efficient windows?  Answering this question would be pretty impossible.  You would need to go get proof from each property and provide it....which won't occur.  Unfortunately value for windows just doesn't happen.  Any extra you spend on windows, you aren't going to get.  I know, I know...supply chains don't make it so that we can get "entry" level windows right now.  Which means I either need to offer less on the purchase price of the home when I buy it...or just eat the costs of the better windows I am using.  If your property has reasonably good conditioned windows...keep them.  Because you don't get any extra value on windows.  The same with roofs too (if anyone else is reading this).The 2/1 - I would 100% be contesting this...I've got to provide 3-5 other comparable properties though.  And they have to be more comparable to my property than this 2/1....so if this 2/1 is similar in square footage, year build, condition, proximity, and just sold...then I need to provide a property that is MORE similar in square footage, MORE similar in year build, MORE similar in condition, and MORE similar in proximity, etc.  I can't go and find a property similar to mine that is 3 towns away...that would not be a comp.  Now if that 2/1 is ALREADY 3 towns away, then mine just needs to be MORE similar...so even 2 towns away would be more similar, right?  If that 2/1 sold last year...and I have a property that sold in January....that January property is MORE comparable.Half Acre vs. Full Acre - what do your comps show?  Are there any properties like yours that are on one acre?  If not, then it's like that Lake House example.  It's up to the opinion of the appraiser....and that opinion my be very different than ours.  I need comps to justify the value. 
• Windows - how many comps don't have windows?  None, right?  So how many of those comps will have energy efficient windows?  Answering this question would be pretty impossible.  You would need to go get proof from each property and provide it....which won't occur.  Unfortunately value for windows just doesn't happen.  Any extra you spend on windows, you aren't going to get.  I know, I know...supply chains don't make it so that we can get "entry" level windows right now.  Which means I either need to offer less on the purchase price of the home when I buy it...or just eat the costs of the better windows I am using.  If your property has reasonably good conditioned windows...keep them.  Because you don't get any extra value on windows.  The same with roofs too (if anyone else is reading this).
• The 2/1 - I would 100% be contesting this...I've got to provide 3-5 other comparable properties though.  And they have to be more comparable to my property than this 2/1....so if this 2/1 is similar in square footage, year build, condition, proximity, and just sold...then I need to provide a property that is MORE similar in square footage, MORE similar in year build, MORE similar in condition, and MORE similar in proximity, etc.  I can't go and find a property similar to mine that is 3 towns away...that would not be a comp.  Now if that 2/1 is ALREADY 3 towns away, then mine just needs to be MORE similar...so even 2 towns away would be more similar, right?  If that 2/1 sold last year...and I have a property that sold in January....that January property is MORE comparable.
• Half Acre vs. Full Acre - what do your comps show?  Are there any properties like yours that are on one acre?  If not, then it's like that Lake House example.  It's up to the opinion of the appraiser....and that opinion my be very different than ours.  I need comps to justify the value.

• Windows - how many comps don't have windows?  None, right?  So how many of those comps will have energy efficient windows?  Answering this question would be pretty impossible.  You would need to go get proof from each property and provide it....which won't occur.  Unfortunately value for windows just doesn't happen.  Any extra you spend on windows, you aren't going to get.  I know, I know...supply chains don't make it so that we can get "entry" level windows right now.  Which means I either need to offer less on the purchase price of the home when I buy it...or just eat the costs of the better windows I am using.  If your property has reasonably good conditioned windows...keep them.  Because you don't get any extra value on windows.  The same with roofs too (if anyone else is reading this).
• The 2/1 - I would 100% be contesting this...I've got to provide 3-5 other comparable properties though.  And they have to be more comparable to my property than this 2/1....so if this 2/1 is similar in square footage, year build, condition, proximity, and just sold...then I need to provide a property that is MORE similar in square footage, MORE similar in year build, MORE similar in condition, and MORE similar in proximity, etc.  I can't go and find a property similar to mine that is 3 towns away...that would not be a comp.  Now if that 2/1 is ALREADY 3 towns away, then mine just needs to be MORE similar...so even 2 towns away would be more similar, right?  If that 2/1 sold last year...and I have a property that sold in January....that January property is MORE comparable.
• Half Acre vs. Full Acre - what do your comps show?  Are there any properties like yours that are on one acre?  If not, then it's like that Lake House example.  It's up to the opinion of the appraiser....and that opinion my be very different than ours.  I need comps to justify the value.

*Whew*  I know that was a lot but I hope it makes sense in some way.  Feel free to ask anything additional if you need.  Here to help in any way if I can.

Greg Scott · Answer

Occasionally you will get someone who doesn't want to admit they made a mistake.

If it is worth it to you, I'd go to another bank and hope you don't get the same appraiser.

Greg Kasmer · Answer

Ryan - Sorry to hear about your situation. I've been there myself once or twice. It especially hurts knowing that you have some solid claims as to your rationale. However, given that you're already appealed the appraised value and the response was no adjustment I think you have basically a few options:

1) Take the value "as is" and move forward leaving money in the property by not being able to take as much cash out. On the upside your cash flow moving forward should be higher with a lower mortgage payment.

2) As your current lender if they are willing to increase the LTV. Or, perhaps they would consider a personal/business line of credit that you can tap into during your next deal to help cover any costs on your next project. Or, even consider a hard money or private lender to help supplement the project.

3) Go to another lender and see how much an appraisal would cost from them. If it's reasonable for your project and they have similar terms it may be worth it to spend the extra money especially if you think you have an extra $20k in value.

Good Luck!

Greg

Bruce Lynn · Answer

One thing I often do for sellers, is help out the appraiser.

I prepare a booklet for them to help manage their decision making process.  I want to make it easy on them.

So I pick the comps for them that I want them to use...and I don't just pick 3/4....I'll pick 6 just so they know I'm not cherry picking.

Leave them before and after pictures....so they can see the work done.

I leave them invoices and a list of the upgrades and work done.

I leave them notes as to why certain properties should not be used as comps....for example your one with the weird dining room...or foreclosures..or short sales...or the ugliest house in town.

They have a lot of liability and responsibility to the lender and investors.....remember the appraisal is for them, not really for you.  They have 80% or more of the investment vs your 20% or less in most cases.

So everything you've mentioned in the OP, I would be documenting for them BEFORE they do the appraisal....I leave it in the house and often email it to them too, so they can cut and paste.

Jason Wray · Answer

@Ryan G.

Ryan one thing you can do is ask for the appraisal rebuttal forms and use them to your advantage.  I have learned that no appraiser likes being told they did a bad job.  How ever they are also under a huge crunch to put together appraisals with comparable sales, measurements, adjustments, active listings and its not as easy to do all for that and then some when your being rushed to get to (5-6) homes a day.  The rebuttal gives you the option to look and ask your realtors for help on seeing if there are any sold comparable sales within a reasonable mileage and sold within 90 days.

You may be able to find a sale that was just a day or two after the comp he/she used but is closer in proximity or may be a more efficient comparable based on your home features.  You need to be very specific and the home sales cannot be several miles away or sold later then a 90-120 day window in most cases.  It is also best if you can find 3-5 but examples but plead your case on which one of his comps is the worst one hitting the negative adjustment/average and try and find a replacement.  That's easier then saying the report is low due to ignoring cosmetic upgrades because that's a no win situation every time.  Lot size, square footage, pools, # or car garage, age of construction etc make more of a dent.

Mike Dymski · Answer

The appraisal industry is ripe for disruption.  Valuations are often way wrong (particularly in commercial) and wait times are in weeks and months rather than in days for a work product that can be automated with data.

Jason Hirko · Answer

@Ryan G.In my experience, arguing that your opinion is right and the appraisers is wrong (see point 2 & 4) never works, as this is, after all, the Appraiser's opinion of value... not yours. However, if you can find factual errors (point 4), and point them out to the appraiser in a diplomatic way, often times they will be willing to correct the mistake, which changes the value. Give them a way to save face. As for point 3, that should be covered in a condition improvement. You can't expect the appraiser to find the exact same house in the exact same condition. These are comparables, not identicals.

Ryan G. · Answer

@Andrew Postell Thank you for the details! That is very helpful going forward. I had thought about the lake house scenario before, but I hadn't considered 'proving' other comps don't have new windows. That is probably half of what bit me here.

My 1 acre lot is a bit the 'lake house' in the area, as most lots are half acre. Having a half acre fenced in back yard and a half acre front yard is clearly noticed and appreciated by my tenant; though maybe this appraiser is a city slicker! You've given me a lot to reflect on for my next properties aspects!

Whacky appraisal logic on Cash Out refi?

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