let’s talk : LOW APPRAISALS

Good morning!

This week we are taking a break from talking about the Philadelphia venture and switching it back to Binghamton. Over the past few months we have been posting about a deal we had been working on out there where we were executing a cash out refi on one home, and putting two other properties under a blanket loan. After 3+ months of work on this deal, we were SO close to the finish line when we got some bad news. One of the houses we had LOVED and were SO EXCITED about came in with an appraisal WELL BELOW what we offered for the property. We are talking almost $50,000 BELOW what we offered… We were SHOCKED. So, let’s talk about what to do when this happens.

So, as we do, let’s talk Real Estate, let’s talk APPRAISALS – WHAT DO I DO WHEN IT COMES IN LOW?!  …

QUICK BACKGROUND ON THIS PLACE
This house was a fully rented, super cash flowing property. When we ran the numbers we truthfully thought we had hit gold. Negotiations went smoothly, the seller was SO GREAT about making any post-inspection fixes that we requested, AND he guaranteed rent through May 2019 in the event something were to happen with the current lease. Things were looking up out there after some serious drawbacks of trying to make Binghamton “happen” for us.

BUT, THEN WE GOT THIS APPRAISAL..
We heard back from the bank a week or so ago with news on the numbers. Everything came in okay, EXCEPT for this property.  The ironic part about all of this was that if I was sure about any of the properties IT WAS THIS ONE. It cash flowed BEAUTIFULLY, it was in GREAT SHAPE, and the inspection came back without any red flags.

WHY DO APPRSAILS COME IN LOW?
There can be a plethora of different reasons, but some include…
Artificially inflated prices
Declining local market values
Lack of true comparables
Incorrect evaluation
The list goes on!

SO, WHAT DID WE DO?!
Reviewed The Report
We asked to see the report ourselves, however in order to do this we had to pay for the reports and overnight a check to the bank. So, we quickly wrote a check for ~$1,500 to see the three reports and began our investigation.

Consulted With The Agent On The Deal
After careful review, we reached out to the agent on this deal. This particular property is a dual agency deal. He provided us the comps he used to come up with the price. It was clear that there was quite a difference in opinion between the agent and the appraiser. But after some back and forth discussion with the agent we then…

Reached Back Out To The Lender
We are not allowed to talk to the appraiser ourselves, so we reached back out to the bank and provided them the comps our agent had used on this deal in hopes to have the appraiser re-evaluate his findings…. Ultimately the appraiser DID NOT change his mind so we had to move on to our next step which was to…

SERIOUSLY Evaluate Our Next Move..

 

SO, WHAT WERE OUR OPTIONS FOR NEXT STEPS HERE?
Well we had a few different approaches we could explore!

We could…
Order Another Appraisal
We reached out to the bank regarding what it would entail to order a new appraisal. They essentially told us that we could pay for a second appraisal if we wanted to, but to expect the same result. BY THE WAY – IS THIS NORMAL?! Is a bank supposed to say that to you?! In the event we ordered a new appraisal I was curious as to how the bank may use it… turns out that is totally up to the bank! They can either average out the two, take the higher, or keep the lower value – it is 100% subjective and up to them.

We could…
Make Up The Difference In Cash
If this were a few thousand-dollar difference maybe we would consider this BUT THIS WAS ALMOST $50,000 and something we, in good conscience, could not do.

We could…
Renegotiate The Price
Unfortunately, even if we or the seller believes the house is worth a higher price, it is ultimately up to the bank to decide what they are willing to lend on. The bank has stated they will only lend ~$50,000 below the current price so it is up to the seller if he really wants to lower the price here. Unless the seller finds a cash buyer, or a less conservative appraiser, he MAY continue to run into this issue.  

We could…
Walk Away
Our contract has a financing contingency in it that states in the event we are unable to obtain financing we could walk away from the deal.

We could…
Find Alternative Financing 
Just because we were unable to obtain bank financing on this deal, does not mean there are not other options out there. We have proposed the idea of seller financing or assuming the current mortgage. TBD if this ends up working out for us or the seller!

WHAT COULD WE HAVE DONE TO PREVENT THIS?
That is my question for you! I honestly do NOT know?! Perhaps more due diligence on the home, or the lender? Or, is an appraisal something that is just truly out of our hands?

Feel free to comment on the blog post HERE and let us know what YOU think!

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Happy Wednesday! 

Erin 

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Data Sources for Today’s Content: 

https://www.trulia.com/voices/Home_Buying/My_appraisal_came_in_lower_than_my_offer_now_what-275235
https://themortgagereports.com/12508/my-home-appraised-too-low-appraisal

https://www.thebalance.com/how-to-deal-with-a-low-appraisal-1798414 

ME! – this week’s post is based on my personal experience and findings