Help! Appraisal came in MUCH lower than ARV estimate...

[Alyssa Balam]

We're ran into our first BIG hiccup in real estate....

We purchased a large SFH in the area for $185K and took a loan out for $235K (to use as construction loan for the reno) with seemingly lots of update potential to turn into a triplex. The renovation is complete and it's 3 units now, but due to it being so close to the holidays, we haven't found any tenants yet.

Used hard money to purchase the property and now it's *time's up* and we need to refinance! Unfortunately, the appraisal just came back for $235K when we had estimated along with our real estate agent an ARV closer to $340K based on comps. This is a crushing difference.

Does anyone with more experience have any advice on how to best mitigate a HUGE loss here? We're already asking for another appraisal, but do not have high hopes. The refinance is now set to require $80K cash to close. 

Thanks in advance BP community!! 

[Omar Ramirez]

I'm sorry to hear about this. However, this issue is quite happens from time to time among my clients. The good news is that there's a way to improve those numbers. Most appraisal companies allow for disputes. You should inform your lender that you want to dispute the "as-is" value listed on the appraisal. Keep in mind that you only have one chance to dispute that report, so it's important to research the report thoroughly and identify the areas that need to be disputed. When I review the reports with my borrowers, we usually find one or two things that need correcting.

Condition- If you've recently completed a full rehab on your property, you'll want to aim for a C2 condition rating on the report. This rating means that your property is "like-new" and has been fully rehabbed, and it's the best rating you can get for properties that have been rehabbed.If the report lists a C3 or below, don't worry! You can dispute these conditions and support your claim by providing comparables with C2 conditions. Don't hesitate to reach out if you have any questions or need further assistance.

Property Comparables- It's really important to keep in mind that if your property has 4 bedrooms and 2 bathrooms, but the comparable properties listed on the reports show 3 bedrooms and 1 bathroom, those comparables might not be accurate and could potentially impact the value of your property. Just something to keep in mind!

When you're looking at the reports and you feel like there's something that needs to be disputed, it's important to send over comparable properties that have similar conditions and size configurations. Just a heads up, though - if you're trying to compare a rehab property, don't use newly built properties as comps because they won't be approved.

When you're trying to compare properties, you want to find ones that are similar in size, have the same number of bedrooms and bathrooms, and were sold within the last six months. The best way to do this is to look for comparable properties within a one-mile radius of your subject property. Remember, the closer they are, the better your comps will be!