Appraisals came in WAAAAY too low? Options?

[Jeff Plotkin]

I went for my first two BRRRR deals at the same time this summer and everything went great. I got tenants in both properties and they turned out beautifully. Both homes were purchased and rehabbed with cash. Today, I got the appraisals back for both properties (doing both BRRRRs as two separate loans from the same lender) and they came back insanely low. The house next door to one of them sold for $165k but mine appraised for $123k, and the other house was even lower.

What should I do? Can I ask for a second appraisal? Should I try waiting a few months and go with a different lender? I can't accept these loan terms at these appraised values. 

[Stetson Miller]

@Jeff Plotkin The best part about real estate investing is that there's often a creative answer to every issue. You don't necessarily have to go completely with either of those options, it may end up working better for you to do a combination of both. I know you said you had an expected appraisal amount, but have you tried to compare your returns at that price, to your returns at an appraisal price somewhere in the middle?

It's very rare that you're going to come out victorious fighting a lender, they're not interested in negotiations, but it's slightly less rare to be able to meet them in the middle. They're going to have to trust the appraiser, as this is the only other party on their side that that has no interest in the loan proceedings. This is the reasoning behind appraisers being paid flat fees, rather than being commission based. I would suggest looking into how far the bank is willing to go in questioning the appraisal. If they're not willing to budge, your best bet is waiting the full 6 months, and potentially trying again with a different bank.

The good thing about the BRRRR strategy is that, at this point, you've gotten past the difficult part. In the absolute worst case scenario, assuming you don't end up pulling any money out of these properties, you have two rentals that you're gaining income from. Obviously this isn't close to ideal, but it's not a bad way to end up on the other side of this either.