House #19: Appraisal Issues

January 5, 2011 · 18 comments

Our record with getting our houses to appraise has been tremendous over the past couple years. Not only are we careful when we buy, but we make sure the final product is the best in its price range, we work closely with the appraisers to make sure they have the information they need, etc.

Unfortunately, all that work goes out the window with the appraiser makes a big mistake…as happened this week on The Flood House first appraisal…

In this market, appraisers will tend not to value a house much above the sale price of the property, even if it’s worth a good bit more. Overvaluing the property makes the lender/underwriter question why there is such a discrepancy between the sale price and the market value, which puts scrutiny on everyone — including the appraiser. So, I’ve seen a number of times when an appraisal actually skewed the value down so that it didn’t appear too high compared to the sale price.

This shouldn’t ever cause a problem, except in extreme circumstances like The Flood House appraisal. It appears that the appraiser thought the sale price of the property was $90,000 (that’s what he wrote in the actual appraisal report), when in-fact it was actually $97,500. I don’t know if it was communicated incorrectly, if he wrote it down wrong, or what happened, but the appraiser clearly was under the impression that we were selling the property for $7500 less than what we actually were.

And unfortunately, while the value came in above that lower price, it didn’t come in above the real sale price. From looking at the appraisal, it appears that the appraiser could have come in above the higher price (based on the comps he chose and the adjustments he made), but I’m guessing that he didn’t in order to avoid the large spread between the value and what he thought the sale price was.

Anyway, these days, the appraisal goes right to the underwriter, so the mortgage broker and neither of the agents had a chance to catch the mistake before the lender saw it. We are hoping we can appeal, provide some better comps and ultimately get the lender to realize that the value is a good bit higher than the appraisal indicates, but who knows — I guess we’ll find out in a few days. If necessary, I’ll also try to call the appraiser and see if he has any thoughts on how to rectify the situation.

Worst case, if we can’t get the value up, we may lose these buyers. They will no-doubt ask us to lower the sale price to the appraised price, and while we could still make a decent profit by doing that, it would hurt our ability to sell future houses in this area, as it will bring all the comps down. We’d rather lose out on this deal than hurt our profit margin for many future deals.

I’ll keep you update…

18 responses to “House #19: Appraisal Issues”

  1. Stefan says:

    Bummer J Scott,

    Is this an appraiser you use often? If so maybe just a quick call to discuss with him would be good. What things do you think you could have done to prevent this from happening? Do you participate when the appraiser comes out? or do you just give him the lock box code?

    By the way, I agree with you rather loosing these buyers then lowering too much, it will impact the other houses you do in that area.


  2. J Scott says:

    Stefan –

    I take a very active role in working with appraisers. I always meet them at the property, and come prepared with comps, renovation overview, renovation cost breakdown, etc. I’ve never had an appraisal not come back high enough on one of our properties where I was there during the appraisal walkthrough.

    As for this situation, I’m not sure what could have been done differently. The appraiser asked me what the contract price was, and I even saw him write down the correct number on his notepad. So, something must have happened later where he got his numbers confused. Not sure there is anything I could have done to prevent it…

  3. Mattthew says:

    What a corrupt market. The appraisal should have NOTHING AT ALL to do with the agreed upon sale price. The appraiser shouldn’t even KNOW the sale price, in my opinion.

  4. J Scott says:

    Matthew –

    I completely agree that everything about appraisals is messed up. That said, the fact that the appraisers know the sale price has actually helped us in the past, so I’m not complaining too much. But, in this case, it’s sad that the value was purposefully pushed down just so the appraiser wouldn’t have to explain himself…

    The whole industry needs to be overhauled, and the appraisers themselves are pretty much stuck in the middle, trying to do the right thing but also trying to cover their butts. I don’t envy their position…

  5. Stefan says:

    Thanks for your comments.

    Hopefully it will solve itself and if not you will probably find some other buyers rather quickly. Judging from what little I know about you it seems as if you are always right in price and do a great job on the rehabs.

    I wonder if as you ramp up the number of projects you do every year, these kind of things will happen more and more as well? What’s your thoughts?


  6. Bill says:

    That sucks about the appraisal. I don’t know with the flood issues and getting qualified and willing buyers I would probably go down on price this time and live to fight another day. Hey but what do I know, you are the one making money at this. On a side note are you buying most of your sales as reo? I don’t know about Atlanta, but the banks here in Louisville don’t seem to be reasonable. Just offered 78K cash for a house which would have an arv of 140-145k after 30k in repairs, and they thought it was unreasonable.

  7. Shae Bynes says:

    Ugh. That stinks. Hope you’re able to get it rectified somehow….if not, on to the next buyer I guess!

  8. […] How To Deal With Appraisal Issues When Rehabbing Homes Posted by: claire | Category: Flipping Houses, Real Estate Investing, Rehabbing Houses […]

  9. J Scott says:

    Hey Bill –

    If we were only going to take a hit on the profits on this property, I would definitely consider dropping our sale price to the appraisal price. But, because we plan to be rehabbing several houses in this area, if we drop the price, it’s going to hurt our comps on future houses as well. Since there aren’t a lot of retail comps in this area to begin with, that could seriously hurt us.

    So, while we’re not opposed to dropping our price somewhat, we need to plan for how it’s going to affect us later…

  10. ezra says:

    I’m guessing the buyers don’t have the cash to make up the difference?

  11. J Scott says:

    Ez –

    We haven’t yet discussed this particular scenario with the buyer’s agent, so we don’t know for sure if that’s a possibility. In our experience, buyers in this price range generally don’t have a lot of cash to contribute, so the likely answer is no…but I don’t know for certain.

    Hopefully we can get this rectified without having to go down that road…

  12. Green Mountain Realty says:

    Yep, appraisals can always be an issue when we sell homes here in the Asheville NC area. Thanks for the post.

  13. Tom Tarrant says:

    That sucks man. I had an appraisal Friday at our recent rehab. I met the appraiser there, handed him my 3 comps and a copy of the contract so he knows what we sold for. He said he’d call me by Wednesday if he cant hit the number and we’ll figure something out together, They dont go on price per sq ft, more try and house match. he said he’d look in a neighboring more expensive neighborhood then adjust for land value. Over the past few years we’ve blown comps out of the water, sometimes selling for $60-70k higher than average and havent had problems. Every market is different I guess, maybe they are more strict in ATL cause home prices are dipping. In TX if you get a low FHA appraisal it sticks with the property for a year so that can really screw you up. Good luck dude!

  14. Mark in Fl says:

    “Overvaluing the property makes the lender/underwriter question why there is such a discrepancy between the sale price and the market value.”

    That’s the first time I’ve heard that explanation. Here too, the appraisals just happen to magically come in at the contract price. I’ve questioned the practice for years and never got what I felt was a straight answer. You’re probably right although it seems counterintuitive since theoretically the lender’s security interest is enhanced with a lower LTV.

  15. Mark in Fl says:

    Call me cynical, but I always thought it was just appraisers doing a classic CYA in the case of overvalued properties and pleasing their realtor/lender clients when the value is not quite there.

  16. I have had similar issues with appraisers. I have had some success at getting the appraiser to change his opinion by reviewing his data and finding errors. I was polite but firm. Thanks for the post.

  17. riz says:

    Hi Scott,
    Our house just got appraised 42k lower than the sales price (607k)! There are a few things on the appraisal that i think are unfair. Some higher valued comps which had similar quality finishes were not used. Appraiser did not complete the ‘cost basis’ evaluation and only used comparable sales method. And he was not local (from MD) and not familiar with the neighborhood. This is in the Northern Virginia suburbs of DC and a completely variegated area, much like most urban zones. Of course the buyer’s are standing firm at the appraised value of 565k because the managed to find the one **item that was incorrectly price marked at the department store**. My agent is also taken by surprise by the low number.
    I’m not sure I want to re-list and wait another 60-90 days for another contract, more down-time and additional holding costs. We’d be incurring a loss of 25k to sell at appraisal price.
    what should I do?!? I hate throwing in the towel…

  18. J Scott says:

    Hi Riz,

    If you can find errors in the appraisal and/or can provide better comps than what the appraiser used, my recommendation would be to communicate that information directly to the loan officer that is handling the loan. The loan officer should have the ability to challenge the appraisal and have the appraiser reconsider the results, but will need to provide a justification for that challenge. Talk to the loan officer about this…he should be able to help direct you, especially if he knows that the deal won’t go through with the current appraisal.

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