by Tod Snodgrass
Real estate funding providers (banks, et al) use appraisals as a tool to establish property values. However, appraisals can come in lower than expected, especially in an appreciating RE market. The bad news for Real Estate Investors (REIers) is that a low appraisal can nix a deal you are working on. Also, some appraisals require that repairs be made before escrow closes, which can wind up being a deal killer. The good news is that there are potential ways to still make a deal happen, i.e. help an appraiser arrive at the desired value, challenge a completed appraisal, and/or employ creative ways to get what you need.
How a Low Appraisal Can Cause a Deal to Die
Most lenders require an appraisal, and will normally only loan on the appraised value. For example, say the bank only loans on say 85% of the house’s value, and then the appraisal comes in at less than the contract price. What this means is that the buyer may be forced to bring more money to the closing, or the seller has to lower their price. Lacking more buyer cash and/or a lower price from the seller, the deal may die.
How to Prevent a Low Appraisal in the First Place
1. Tell the appraiser about repairs/upgrades recently done to the property. This informs the appraiser that the home could be in better shape than other similar sales in that area which he may use as comps.
2. Provide comps to the appraiser. Never pressure or cajole the appraiser. Make absolutely sure that the comps you provide actually support the contract value you seek. Make sure the comps are local and current.
3. Be very responsive to the appraiser in terms of returning phone calls and emails promptly.
4. Ensure that the house is in tip-top shape, i.e. it is clean and looks as good as possible when the appraiser is there. Make sure there is no clutter or junk either inside or outside the house. You only get one chance to make a good first impression.
5. Make sure the utilities are on, if at all possible, during the time the appraiser is on the property.
How to Challenge/Deal With a Low Appraisal
Unfortunately in a market where prices are going up, the appraiser must base the value off of sold homes. If prices are appreciating, there is a good chance a property that is under contract now will have a higher price than the sold comps from several months ago. Here are some ways to deal with this type of problem.
A. Look for obvious errors or incorrect facts in the appraisal: wrong number of rooms, incorrect square footage of the house or land, wrong age of the house, the fact that they missed some major upgrades, etc.
B. If you are very sure of your comps, and believe strongly that the appraisal is wrong, request that the bank challenge the appraisal.
C. Request a 2nd appraisal. Yes, this will create an additional cost burden, but it may be worth it if the results come out in your favor. Only undertake this route if you are very sure of a positive outcome.
D. Request a 3rd appraisal. If the parties (seller, buyer, bank) cannot agree on either appraisal, then consider “baseball arbitration”, whereby all parties agree to abide by a final, third appraisal.
How to Handle a Property That Requires Repairs be Made Before Escrow Opens/Closes
It is required that the home be in livable condition, i.e. all the major systems must be functioning; plumbing, HVAC, electric, roof, etc. There can’t be doors off their hinges, holes in the walls, backed up toilets, broken windows, mold, exposed wiring or chipping paint. If any of these (negative conditions) exist, then the lender should require the home to be in a safe condition before escrow opens. Smart sellers make repairs on issues that hold up financing, knowing if they don’t, the home won’t sell due to lack of funding. If in doubt, call out in writing the repairs that need to be made in the offer you make.
What We Do: Quickly provide short-term, first position funding, in smaller amounts, to investors who own a property free/clear but cannot or will not use hard money lenders or conventional funding sources. See more info below.
Contact info: Tod Snodgrass, firstname.lastname@example.org, 310-408-7015