Appraisal outcomes are messing up the BRRRR strategy, Why?!

BRRRR - Buy, Rehab, Rent, Refinance, Repeat

Appraisal outcomes are messing up the BRRRR strategy, Why?!

Investor · Marquette · Member since 2018 · 10 posts · 4 votes

Hello BiggerPockets community,

I'm hoping somebody may be able to shine some light as to why my appraisals are coming in much lower than current market values. I have been buying fixer uppers, both single family and multi family, rehabbing them, and they are not appraising for even close to what I know I could get on the open market.

I'm trying to pull more equity out to continue expanding our portfolio, but the appraisals are coming in ~15 to 20% lower than expected. Is there any way around this? I've tried walking the property with one appraiser to explain all of the work we did to the property, but they honestly didn't seem to care. One time, I had an appraiser show up in a yellow BMW convertible, he spent under 5 minutes walking through a duplex, left, and charged me $750 for an appraisal that I felt was not accurate as to what it would sell for on the MLS.

From the outside, It seems that appraisers look at what I paid for the property, then look for comparable houses that sold for around that price, and then come up with a price that has appreciated minimally compared to the amount of work we have put into the homes.

Am I just having bad luck with appraisers, or is there a way around my conundrum. Without accurate appraisals, the BRRR method is no good!

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Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

Unpopular opinion: some appraisers are local and dislike investors coming in to their neighborhood and "taking advantage" of homebuyers by forcing appreciation. This is especially true if the appraiser finds out what you paid for it.

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Casey Hoerth
Investor · Tyler, TX · Member since 2021 · 17 posts · 22 votes
4y
Hi Cory,
Some years ago I was a loan officer and dealt with similar issues with appraisals. Like yourself, I came to realize that appraisers are going to look at comparable homes and then find a median between those homes, or maybe a little bit more, than those comparable sales within the year. That seems to be the formula, and no, they don't seem to care much about any improvements or updates.
When estimating home values with home owners, I learned to prepare them for this, and took a very skeptical approach when they would tell me how much better their home is than anyone else's and how much of a difference their updates would make on the home's value. Typically, if the improvements don't involve adding floor space or rooms (permitted, might I add), then I would never really take much stock in improvements or updates.
That's just my experience as a guy behind a desk in Dallas ten years ago. And keep in mind, I never was an appraiser.

1 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
Try to sell one of these properties for what you think it’s worth. If it doesn’t sell the appraiser is right. If it does sell, then you have a new comp for the appraiser. Especially if you tell them it was a property you bought and fixed up, just like the one they’re appraising today. Let them see it can be done.
2 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
4y
Unpopular opinion: some appraisers are local and dislike investors coming in to their neighborhood and "taking advantage" of homebuyers by forcing appreciation. This is especially true if the appraiser finds out what you paid for it.
6 Reply
Nick Coons
Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes
4y
Quote from @Bill B.:

Try to sell one of these properties for what you think it’s worth. If it doesn’t sell the appraiser is right. If it does sell, then you have a new comp for the appraiser. Especially if you tell them it was a property you bought and fixed up, just like the one they’re appraising today. Let them see it can be done.

While this would certainly answer the question about value, it does sort of seem to solve the problem by pushing someone off of a cliff to see if they're a witch. (Reference: The idea of pushing someone off a cliff to see if they're a witch would result in either them falling to their death, in which case they're not a witch; or they fly away, in which case they are. If they're not a witch, you've got your answer, but now they're dead).

The OP wants to be able to hold and rent the property. If he sells it, he might get what he thinks it's worth, but now it's no longer a long-term rental for him. I don't know what the actual solution is, but since people have been successfully using the BRRRR strategy for a long time, there definitely is a solution outside of simply selling the property (even if that solution is legitimately "you're overvaluing the property, and the appraiser is right"). Perhaps the OP needs to pull his own comps to see if what he thinks the property is worth is accurate.
2 Reply
Marc Winter
Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes
4y
What is the lender's policy on investor cash-out refi? LTV of 65--75%? Appraisers will normally try to come in at a purchase price, but not so much at a refi. Also, multi family (5 units and up) are appraised on the rent roll.
Perhaps try a local 'portfolio' lender, ie, one that holds their own mortgages rather than selling them to Fanny/Freddy. Establish a relationship with that type of lender and you'll have a much smoother time.
Best!
2 Reply
Eric S.Pro Member
Investor · Concord, NH · Member since 2018 · 28 posts · 19 votes
4y
I got burned twice on the same duplex with three different appraisals - 2 really low, and one exactly where I thought it would be. Appraiser used single family homes as the comps for the higher one but the bank caught that right before re-fi closing and threw it out. The difference ended up being a swing of $125k!!!.

In my area it was lack of 2-3 units that sunk me, as the original comps that I used to value the deal became too old to use once the reno was done. They somehow found 2 newer ones that were so bad (a dilapidated farm house with a zoned second ADU, and ranch house with a legal basement unit) I would have never in a million years thought they could be used as comparable. The adjustments up were still not enough to hit my acquistion payoff amount and I ended up having to bring a little money to the closing table (ran out of time). Silver lining was a stupid low mortgage, amazing cashflow and still decent COC return for a "failed BRRRR".

Moving forward not much you can do but be very realistic going into anything new, and have A LOT of comps at your disposal. As others have said, appraisers literally don't give an F about condition/renovation. They walk through, measure, take a few pics, then scour the MLS for 80% of their work. The comps are everything.

3 Reply
Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
4y
It is my view that refi appraisals in my market are conservative regardless if associated with a BRRRR or not. It has nothing to do with the low price paid or any jealousy by the appraiser. In addition, if the appraisal is really bad then contest it and find the comps that justify a higher valuation (I received an $80K adjustment on a really poor appraisal that we so easy to show was poor as the per unit cost on my poor appraisal was far lower than any other per unit comp)
The pro forma has to take into account the conservative refi appraisals. The conservative refi appraisals make it challenging to extract all of the investment out of the property (at lease without an assist by market appreciation). Ideally a BRRRR has $0 trapped when refinanced, but if the value add returned a good return for the cost and a little of the investment is trapped, this is will still produce a very high ROI. I desire my value add to add value of at least 2x the cost. If my value add costs $50k, I expect the value added to be at least $100K. If you find properties with this type of value add, your ROI/COC will be great even if you cannot extract all of your investment. If you happen to extract all of your investment you hit the infinite ROI. To me infinite ROI is a homerun but is not necessary to do great.
Good luck
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Cory HowesPro Member
OP
Investor · Marquette · Member since 2018 · 10 posts · 4 votes
4y
Quote from @Dan H.:

It is my view that refi appraisals in my market are conservative regardless if associated with a BRRRR or not. It has nothing to do with the low price paid or any jealousy by the appraiser. In addition, if the appraisal is really bad then contest it and find the comps that justify a higher valuation (I received an $80K adjustment on a really poor appraisal that we so easy to show was poor as the per unit cost on my poor appraisal was far lower than any other per unit comp)
The pro forma has to take into account the conservative refi appraisals. The conservative refi appraisals make it challenging to extract all of the investment out of the property (at lease without an assist by market appreciation). Ideally a BRRRR has $0 trapped when refinanced, but if the value add returned a good return for the cost and a little of the investment is trapped, this is will still produce a very high ROI. I desire my value add to add value of at least 2x the cost. If my value add costs $50k, I expect the value added to be at least $100K. If you find properties with this type of value add, your ROI/COC will be great even if you cannot extract all of your investment. If you happen to extract all of your investment you hit the infinite ROI. To me infinite ROI is a homerun but is not necessary to do great.
Good luck

Hey Dan, thanks for the insight! In my experience with appraisers, they have told me that if I put 50k into a property, It would be a home run if I got it reappraised for the extra 50k. I was able to achieve something similar on one building by refinishing an attic space and adding an additional master bedroom, bathroom and square footage. i.e. I bought a $201,000 2 story duplex, 6 bedroom total, unfinished attic space. With the completion of finishing the attic space, it added 750 sq feet. We also added a beautiful deck that adds as a separate fire escape to the second and third story. I've seen duplex's selling for 275k to 310k in this market, and my duplex appraised for 245,000. I gained 44k in equity, which is about what I spent in material alone (I did the majority of the work). But if I would have hired it all out, it would have cost 100k to do all the work, and the re-appraisal reflected just a portion of the true labor cost (my time was free?). I hear endless stories of folks getting excellent re-appraisals and pulling double what they put into it. But out of the 6 or 7 appraisals I've received, they always come in short. I may need to contest and show them some more realistic comps. I didn't know that was possible. Sounds like I need to pry a little harder. Thank you!
0 Reply
Mike Davis
Lender · Annapolis, MD · Member since 2022 · 154 posts · 70 votes
4y
@Cory Howes that stinks having to deal with that. I definitely don't know your market area, could you possibly be rehabbing the properties too much for the market they are located in?
1 Reply
Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
4y
@Cory Howes we're in a rapidly rising market in most areas. Appraisers are looking through the rearview mirror, meaning they are using historical comps which can be up to a year old. The bottom line is that prices are rising faster than comps can keep up. This is a common problem in hot markets where prices are skyrocketing.
3 Reply
Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
4y
Quote from @Cory Howes:

Quote from @Dan H.:

It is my view that refi appraisals in my market are conservative regardless if associated with a BRRRR or not. It has nothing to do with the low price paid or any jealousy by the appraiser. In addition, if the appraisal is really bad then contest it and find the comps that justify a higher valuation (I received an $80K adjustment on a really poor appraisal that we so easy to show was poor as the per unit cost on my poor appraisal was far lower than any other per unit comp)
The pro forma has to take into account the conservative refi appraisals. The conservative refi appraisals make it challenging to extract all of the investment out of the property (at lease without an assist by market appreciation). Ideally a BRRRR has $0 trapped when refinanced, but if the value add returned a good return for the cost and a little of the investment is trapped, this is will still produce a very high ROI. I desire my value add to add value of at least 2x the cost. If my value add costs $50k, I expect the value added to be at least $100K. If you find properties with this type of value add, your ROI/COC will be great even if you cannot extract all of your investment. If you happen to extract all of your investment you hit the infinite ROI. To me infinite ROI is a homerun but is not necessary to do great.
Good luck

Hey Dan, thanks for the insight! In my experience with appraisers, they have told me that if I put 50k into a property, It would be a home run if I got it reappraised for the extra 50k. I was able to achieve something similar on one building by refinishing an attic space and adding an additional master bedroom, bathroom and square footage. i.e. I bought a $201,000 2 story duplex, 6 bedroom total, unfinished attic space. With the completion of finishing the attic space, it added 750 sq feet. We also added a beautiful deck that adds as a separate fire escape to the second and third story. I've seen duplex's selling for 275k to 310k in this market, and my duplex appraised for 245,000. I gained 44k in equity, which is about what I spent in material alone (I did the majority of the work). But if I would have hired it all out, it would have cost 100k to do all the work, and the re-appraisal reflected just a portion of the true labor cost (my time was free?). I hear endless stories of folks getting excellent re-appraisals and pulling double what they put into it. But out of the 6 or 7 appraisals I've received, they always come in short. I may need to contest and show them some more realistic comps. I didn't know that was possible. Sounds like I need to pry a little harder. Thank you!

In my market to obtain double the cost of the rehab, the rehab cannot be of simply out of date items to get a refi appraisal to add double the cost of the value add. The unit needs to be thrashed to have the rehab provide the best return for the investment especially with the conservative refi appraisals in my market.
Note your value add was not a value add. including your labor, it was a value subtract. I do not know if this was because the unit was not thrashed enough, if you over rehabbed, or it was a result of your market.
I watch various flipping shows where they rehab properties with kitchens that are not great, but not horrendous, same with bathrooms, flooring, etc. They get offers at top of market and appraisals that support the top of market value and make a profit. With the refi appraisals in my market, these appraisals likely would not provide the return I seek and maybe no return. They do work when a buyer is willing to pay top of market price as the appraiser will use top of market comps. I do not see this for my refinance appraisal. I require a kitchen with broken drawers/cabinets. Bathrooms that are discussing or in really bad taste. I rehabbed a bathroom once that had linolemum checkered pattern floor but instead of black and white it was blue and yellow. I rehabbed a different bathroom in the same house that had linoleum on the walls. I understood why; the bathroom had very poor ventilation and a mold issue. I am confident the wife got tired of constantly addressing the mold and had the linoleum placed on the wall.
In summary, in my market it does not suffice for a BRRRR to settle for a purchase that could produce a profit as a flip. You need to find the really thrashed property and/or property that is in horrendous taste. A 1970s kitchen in good shape could use a rehab but will not produce the same profit as the 1970s kitchen that is falling apart with multiple holes in the counter, broken cabinet doors/drawers, etc. Both rehabs will require similar effort/cost, but the kitchen that is falling apart will add the more value.
Finding good BRRRR properties are not easy. In my market there is a lot of competition for these properties. there are investors with teams dedicated to finding these properties. Fortunately, you do not need to find many to be successful. One a year in my market could easily result in 8 digit property worth in less than a decade with little to no money invested in the properties.
Good luck
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John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
4y
On Zillow, I notice that if I buy a fixer and repair it to good order, it will take years for it to come up to market value as there apparently isn't room in their algorithms to allow for bringing a property up to market condition. It's like it's forever "stained" by the low purchase price. It's one of the reasons Zillow is often unreliable for pricing real estate.
0 Reply
Miranda LeMaster
Rental Property Investor · Canal Winchester OH · Member since 2022 · 5 posts · 0 votes
4y

Dan, are your appraisers for refi coming back in and actually seeing the differences made in those rooms that were trashed but are now livable? I'm not talking granite new fixtures and the like which a flip might benefit from but a truly wrecked place before that is being made nice. I worry our appraisers are driving by then looking only at comps for a refi and even making sure they know it's been fixed inside is difficult. What strategies have you employed when asking for a refinance appraisal after the work is done?

Miranda
0 Reply
Dan Maciejewski
Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
4y
Quote from @Eliott Elias:

Unpopular opinion: some appraisers are local and dislike investors coming in to their neighborhood and "taking advantage" of homebuyers by forcing appreciation. This is especially true if the appraiser finds out what you paid for it.

I have a client that's a Realtor in another state. She had an appraiser tell her to her face that they thought it was their, "moral duty" to appraise low to slow appreciation.
I also had an appraiser come in 11% low because they lived in the neighborhood and didn't think it should sell that high.
AND, they really seem to hate any profit. I have had 3 come in and say it sold ____ months ago for ____, so I can only add ___%. No matter what the actual market says. In my mind, a distressed cash sale isn't FMV, but they'll use it as such if the feel like it. I'm under contract on a flip that appraised 5% low -- they comped it to itself from 5 months ago and did not account for appreciation at all. This neighborhood is 2.2% month over month right now.
2 Reply
Dan Maciejewski
Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
4y
Quote from @Cory Howes:

Hello BiggerPockets community,

I'm hoping somebody may be able to shine some light as to why my appraisals are coming in much lower than current market values. I have been buying fixer uppers, both single family and multi family, rehabbing them, and they are not appraising for even close to what I know I could get on the open market.

I'm trying to pull more equity out to continue expanding our portfolio, but the appraisals are coming in ~15 to 20% lower than expected. Is there any way around this? I've tried walking the property with one appraiser to explain all of the work we did to the property, but they honestly didn't seem to care. One time, I had an appraiser show up in a yellow BMW convertible, he spent under 5 minutes walking through a duplex, left, and charged me $750 for an appraisal that I felt was not accurate as to what it would sell for on the MLS.

From the outside, It seems that appraisers look at what I paid for the property, then look for comparable houses that sold for around that price, and then come up with a price that has appreciated minimally compared to the amount of work we have put into the homes.

Am I just having bad luck with appraisers, or is there a way around my conundrum. Without accurate appraisals, the BRRR method is no good!

I always advise my clients that refi appraisals are always lower than FMV. I just re-fied a small multi that appraised at least 11% below FMV.

When I have a client reach out I give them appraised value and FMV as separate numbers. I can tell you what it will sell for, but appraisals are all over the place right now. As @Dan H. says above -- definitely use the low appraisal number in your calculations going forward.
0 Reply
Dwayne Poster
Investor · Van Isle · Member since 2021 · 455 posts · 226 votes
4y
Quote from @Mike D'Arrigo:

@Cory Howes we're in a rapidly rising market in most areas. Appraisers are looking through the rearview mirror, meaning they are using historical comps which can be up to a year old. The bottom line is that prices are rising faster than comps can keep up. This is a common problem in hot markets where prices are skyrocketing.

I agree with this prospective. I stopped using Appraisers by in the 05' run up when they failed to keep up with the market. MLS sold data is where its at. To be fair though, a realistic evaluation considers utility above appearance. Working with a local builder during that 05' run up, we adjusted prices upwards weekly to stay competitive with the used market sales.
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Nick Coons
Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes
4y
Quote from @Dwayne Poster:

How do you handle this in a situation where an appraisal is required by the bank in order to secure financing for a refinance?
1 Reply
Dwayne Poster
Investor · Van Isle · Member since 2021 · 455 posts · 226 votes
4y
Quote from @Nick Coons:

Quote from @Dwayne Poster:

How do you handle this in a situation where an appraisal is required by the bank in order to secure financing for a refinance?

I let them do their thing. I have had my bank send out an alternate appraiser, without charge, to secure the business. But for sure, if they defeat you, it is what it is, and you are looking at alternatives. I always give a couple of brokers the opportunity to bid, but the bank always seems to come through. It could be that their appraisers are in tune with my local market.
0 Reply
Brian Pfiel
New to Real Estate · Gainesville, GA · Member since 2018 · 12 posts · 3 votes
4y
@Cory Howes
In my situation I had to go through two appraisers and 4k of improvement to the home. I researched that the property is around 425k but with the right stuff done could be 550k. It was purchased for 289k. The refi appraisal first one came in as 350k. I then switched to a wholesale mortgage supplier and got another appraiser. During that switch I put in 4-5k of improvements to mostly outside for appearance. The new appraisal turned out at 410k.
Through this situation I learned that the document the appraiser uses has at the top an indicator if it is a purchase or a refinance. This make a big difference to the appraiser. Also, another couple sections, one the adjustments can very greatly depending how they want. So if one comp has 1ac land and the subject has 5 they can adjust however they want. Some use a standard others dont. Two, the total rebuild or replacement section is a point of interest. In my first appraisal this section had about 400k with a precentage to the value at only 50% and the second appraisal had 80%. Thus depending on the method they use.
I feel that buyers ultimately drive the price. I am 100% sure I coould have sold it for 425k even without the updates. If it was on the market and the buyer got the appraisal it would have proven but that is my point.
Good luck , i would get another appraisal and small changes to property. Also, dont ever let them know you are appraisal shopping!
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Nick Coons
Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes
4y
Quote from @Brian Pfiel:
Also, dont ever let them know you are appraisal shopping!
Interesting.. in your experience, how does this affect the outcome?
0 Reply
Brian Pfiel
New to Real Estate · Gainesville, GA · Member since 2018 · 12 posts · 3 votes
4y
@Nick Coons, I was informed by the lender that the lower appraisal would sway the new one. I suspect that this has some merit. Though its hard to see what is in the mind of these appraisers.
1 Reply
Lori Williams
Developer · Youngstown, OH · Member since 2019 · 129 posts · 121 votes
4y
I've had a similar situation.

I bought a duplex a few years ago that I've been working on in between other projects. I paid 40k for the duplex. I then put all new windows in, 2 new furnaces, added central a/c, updated electric and plumbing, new kitchen cabinets in both units, did some roofing and chimney work. Then I prepped the entire interior for a major cosmetic rehab - took all the trim down and sanded it to bare wood, took down 2 rooms of ceilings, 1 room of flooring and 1 bdrm wall that had old water damage. Now I'm literally down to skim coating the stucco walls (they did it to hide the water damage), refinishing the floors, putting new light fixtures in and finishing the remodels on the kitchens/bathrooms.

I'm in a revitalizing area. I paid cash for everything that had been done so far, and wanted a small rehab loan to finish the rehab. My SOW showed higher end materials and a complete ceiling to floor remodel, and that I'd already done important updates.

I've had 2 lenders who used out of the area appraisers who don't know the difference between the area I'm in and the deep hood, who used similarly built duplexes in entirely different neighborhoods. And despite very obviously taking the duplex to C2 with the rehab, both appraisers gave the duplex an ARV that was no higher than a C5/C6 property. Meanwhile, there were 2 C4-ish properties that had just sold for prices that were in the general area that would have worked well enough to give me the price I needed for the ARV, but they didn't use them (and they were practically next door).

On purchase, another duplex 3 doors down appraised at 84k. It had no updates, no cental a/c, no new windows, literally nothing had been done to the place in years and years. Yet it appraised higher per sq ft at purchase than the other came out with for the ARV with a full rehab.

I had a house that I was going to sell. Put it on the market for 89k and got an offer in 4 days for 92k. The buyer's bank did a full appraisal that came in at 84k (which was kind of low considering they were comping it to houses "over the bridge", but it's a revitalizing area, and there aren't a lot of comps for fully remodeled houses yet - but at least that appraiser used the fully remodeled houses and took into consideration some of the things my house had that others didn't). The buyer couldn't come up with the difference btw appraisal and his offer, and we were kind of stuck because it was in a portfolio that couldn't be separated.

So we ended up keeping it and refinancing it a couple mos later. The BPO on that same house 2 mos later was 75k. Lender chose to go with the BPO rather than the full appraisal done by a buyer's bank.

Appraisers are all over the place. Some don't do the hard work, and even when you go back and provide them actual comps that are closer to your property in location, and a little closer in condition (your C2 vs a C4 rather than a C5/C6), they hold firm.

And lenders seem to prefer to hold on to an appraisal that uses comps on the other side of town in horrible condition rather than recent comps closer in location that aren't as distressed. And despite getting rents that absolutely justify a higher appraisal from an investment standpoint (rents that are 2%+ of the ARV or appraisal you're asking for)

I have not been able to find the logic in it, but it makes the refinancing difficult. The duplexes are coming in with an ARV that's less than half of what a house next door appraises for that I also rehabbed, and the house is a lightly lesser rehab than my SOW for the duplex. They rent about the same. I don't expect the duplex to appraise as high as a SFH with a similar rehab, but there's no logic to giving them an ARV of a distressed duplex in a bad neighborhood either.

So I am watching the market in that neighborhood. Right now rehabbed houses are priced at a full 20.00/sq ft higher than my house's appraisal last July (which was high for the market last July) and they only need to sell/appraise at 12.00/sq ft higher to show a 20% appreciation over a 9 month period. My instincts on this neighborhood's appreciation over the last 4 years have been spot on, and once the duplexes are finished, they should appraise at a MUCH higher rate than the appraiser's estimated ARV before they were finished.

Lastly, I've wondered if some appraisers think they are the voice of reason in an escalating market. Are they thinking that things are overpriced now, and trying to give them appraisals that reflect where the appraiser thinks the values should be? I mean, I don't think that's how it's done, especially when this isn't just a blip escalation, but has been consistent for 2 years now. And when it comes to investment properties, I can't help but think actual rents received on signed leases should play some role in the appraisal.

Good luck!
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