Keys to Getting a Fair Appraisal
The Do’s and Don'ts of Dealing with an Appraiserw/ Zach Rhodes of Authority Appraisals
Congratulations, almost! You worked well with your St. Louis hard money lender. You finished your rehab. You’re under contract or you found a bank willing to refi your rental.
But now you must face…The Appraiser.
For as long as appraisals have been a thing, real estate investors and appraisers have experienced a love/hate relationship. As an investor, of course you want the appraiser to hit your number, but there are rules, and it’s frustrating whenever the value comes in lower than expected.
Is there anything you can do to help an appraiser reach your desired number? Anything you shouldn’t do?
One thing you should never do is think of the appraiser as an opponent. An appraiser is almost always a good human who will try hard to give you a fair outcome, especially if you know how to share useful information in an acceptable way.
One of these good humans, Zach Rhodes of Authority Appraisals, recently revealed to Bryan Schroeder of FasterFunds Lending what he appreciates most when he goes out to do an appraisal. His suggestions are included here.
Consider some common scenarios. Real estate investors aim at one of two general exit strategies for any project: the fix-and-flip (buy, rehab/clean, sell); or the BRRRR (buy, rehab, rent, refi, repeat). Each strategy calls for a sightly different approach with the appraiser.
Scenario 1: Appraisal for a Fix-and-Flip
You list the house and immediately get multiple offers. Potential buyers drive up the price to $45,000 over list. You know there are no other comps around at that value, but the appraiser must use comps. What can you do to help the appraiser see the higher value?
Do some homework. There is always a range in the selection of comps. You know the neighborhood and which features of your house compare to the highest-valued comps. You know the location of schools and shopping. Sharing this information helps the appraiser select the right comps, adjust and reconcile them, and ultimately choose the value.
Let the appraiser know that there were multiple offers. One seller’s agent recently presented an appraiser with a folder containing a copy of the first page of each offer, redacted to hide personal information. The appraiser appreciated it because it helped him build a case for the accuracy of his valuation for the client and the underwriter.
Most appraisers would agree there is leeway in how the value of a property is set. You should take the opportunity to share any factual information that could be useful in the appraisal.
Do this a little bit before the start, or afterward, or both. Otherwise, stay out of the way and let the appraiser focus on finding the things that justify the value.
Appraisers don’t set out to ruin someone’s day with a low appraisal. They look at the contract. They understand the weight to be given to the fact that the house has been on the open market and the buyer and seller have come to an agreement on the value, with the help of two agents knowledgeable about the market.
Scenario 2: Appraisal for a BRRRR
An appraisal on your rental house comes in low, perhaps $5K below asking, endangering your refi deal. An appraiser is bound to the client, which is usually the bank or other lender you’re trying to refi through. You, as the investor, can’t contact the appraiser directly. So what can you do?
You can gather all of the information you can find to show the scope of work that has been done, along with any other particulars that could help the appraiser reconsider. You can then start a reconsideration request. This needs to go through the bank, not directly to the appraiser. If the appraiser finds that the information in the request justifies a higher value, he will make the adjustment.
In general then, an appraiser appreciates having solid information. This could include things only you know of, as the homeowner, such as the reason for a low-sale in the neighborhood that has brought down values, or comps that aren’t as obvious to an outside person.
Don’t overdo the information-sharing, though. When an appraiser meets an owner at a property, the owner can unwittingly become a distraction. They often want to engage in friendly chat or tell the appraiser every little detail about the work that has been done.
The appraiser usually likes to chat and wants that information, but the owner should try to keep the conversation to the front end or the back end of the time there. Give the appraiser plenty of time to look at things on his own without distraction.
Is it okay to tell the appraiser the value you’re looking for your refi? It’s actually not a sin!
Most appraisers are used to being told the target number. In the case of a sale they already have the contract, made between knowledgeable parties, and they will give that significant weight. The appraiser can use that as a starting point to look for things that justify it. However, if he or she doesn’t find those things, the appraisal may come in low.
Although appraisers take all factors into consideration, it isn’t a guarantee that they will hit the number asked for. However, most appraisers when asked will take a double, even triple, look at all of the information they have to be sure they didn’t miss anything.
Scenario 3: Appraisal for a Prior Distressed Sale
An investor finds a highly motivated seller and buys a house at a very low price. (A distressed sale like this can happen for many reasons unrelated to the quality of the property.) The rehabber fixes it up minimally, and is trying to refi it. He knows the appraiser will consider the extremely low price of the prior sale. What can the investor do to get the higher valuation needed?
Tell the appraiser the story of why it was a distressed sale. Unique, often tragic, circumstances usually explain why the price was set so low, and the story can be very persuasive. The appraiser will consider that.
The Appraisal Process
In the appraisal process, the first consideration is the neighborhood and the surrounding area. The appraiser will try to walk in the buyer’s shoes, noting the quality, condition, and any special features.
The next step is to measure the gross living area. There is often confusion about what square footage counts when it comes to lower level living areas. Appraisers are required to follow ANSI (American National Standards Institute for measurements.)
ANSI says if any area is below grade, even if it’s just one side as in a walkout basement, it cannot be counted as gross living area. People pay more for above grade area. An exception might be a raised ranch or split level where the back wall is below grade.
A finished attic with a sloped ceiling is measured by the area that is five feet or more in height between the ceiling and the roof. In at least 50% of that area, the ceiling has to be above 7 feet to count.
What is counted as a bedroom? A bedroom must be at least 70 square feet, and it has to have a door or egress window to the outside. It can’t be a pass-through room.
Is there a difference between local and national appraisers? Yes, you’re always better off with local lenders and local appraisers. National appraisers give fast, cheap appraisals, not always resulting in the best valuation.
DO give an appraiser comps (choose your three best and explain why you chose them).
DON’T follow the appraiser around and distract them with a lot of chat.
DO give them space to focus.
DON’T give emotional reasons why the house is worth more. Give facts.
DO tell the story of the house if it will make a difference in the valuation.
Following the above guidelines will give you the best possible outcome when it comes time to meet the appraiser.