Appraised 71k under contract, possibly because of the paperwork I handed over

First 4 unit, small older building, all two beds, contract at $560,000. Appraisal came back $489,000 and the loan died on it. I've lost the $650 appraisal fee, $1,900 in inspection and legal, and the deposit came back but the seller has moved on.

What I didn't understand until after: the report leaned mostly on sales of other small buildings and my rents weren't part of the story much. I'd given the listing agent's rent roll, which showed $5,100 a month gross. Actual collected last year was closer to $4,400 because one unit sat vacant four months and one tenant was behind. The appraiser asked for leases. I sent the rent roll again because I didn't have the leases, the seller did, and I never chased them.

The two comps that hurt were both fully renovated and mine has original kitchens in three units. He adjusted for condition, and the adjustments went against me by a lot more than I'd have guessed.

I'm not claiming the number was wrong. It might be right and I might have been overpaying. What I'd do differently is get actual leases and twelve months of bank deposits before the appraisal is ordered, not after, and ask my lender up front which approach the report is going to hang on for a building this size. Those two things I could have controlled.

Answer

1nicole_adeyemiPassivePRO5

@sextant has the cause and @warrant has the reason your fix list is half a fix.

Order it the way it actually broke. You agreed a price off gross rents that were 14 percent higher than what the building collected. Nothing downstream of that was going to save you. The appraisal did what it's for, it put an independent number on a building you'd valued off a seller's document.

On the leases, @warrant is right that on older small buildings there frequently isn't a signed lease to get, so "get the leases first" can be an instruction you can't follow. What you can always get is twelve months of bank statements showing deposits, and if the seller won't produce those, that refusal is the information. A four month vacancy and a delinquent tenant both show up in deposits whether or not anyone ever signed anything.

Second thing, and this is the one I'd actually carry forward. You walked three units with original kitchens and didn't price the condition gap yourself before you signed. Your own walkthrough was the comp adjustment and you skipped it. Nobody needs an appraiser to tell them a 1970s kitchen isn't a renovated one, they just need to have decided in advance what that's worth in their market and subtracted it from the ask.

$2,550 for that is on the cheap end, honestly.

7 replies

3diane_kowalskiPassivePRO9

The rent roll from a listing agent is a marketing document. Learned that on a land contract where the "in place income" was a hunting lease somebody's cousin never paid.

1dmitri_v6CapitalPRO6

Did the leases even exist? On small buildings a lot of the time there's nothing signed, it's month to month by handshake, and the seller can't produce what was never written. Worth knowing because if that was the situation, chasing them harder wouldn't have changed anything and the real fix is different.

2tashaford30PB2APRO7

I'm confused about one thing. Why would rents matter less than comps on a 4 unit? I thought income was the whole point of a rental.

2Rena Expert

@quill the size of the building is doing that work.

One to four unit residential is treated as residential for most lending purposes, so the appraisal is generally built as a residential report with the sales comparison approach carrying the value conclusion. The appraiser finds sales of comparable small buildings and adjusts for differences. Rents show up, often on a small residential income schedule, and they can inform the analysis, but the value conclusion usually rests on the comps. At five units and up the property is commercial, the report is a different product, and the income approach typically leads.

So cairn's building was appraised the way a house is appraised, against other buildings, and the condition adjustments between original kitchens and a full renovation are exactly the kind of thing that moves that grid hard. Weak rent documentation didn't help, but it wasn't the lever.

The practical piece for anyone in this position: ask your lender in writing, before the order goes in, which form the appraisal will be on and which approach they expect to carry weight. Requirements vary by lender and loan product and they change, so get the answer from the person underwriting your file. What you can supply the appraiser is factual material they can verify, signed leases, a rent history, permits and invoices for work done that isn't visible or isn't recorded. That last category is where a human appraiser sees things an automated model can't, and it only helps if the paperwork is in front of them before they write.

2ehernandez74PO2BPRO5

So if the comps drive it, is there any version where the buyer gets to argue? Or does the number just land and you're done.

2dpatel_reCS4A

@anchor there's a reconsideration of value process at most lenders, and you can submit comps the appraiser didn't use. It works when you have a genuinely better comp and it fails when you're just unhappy. $71,000 is a long way to close with comp selection.

@cairn the thing I'd push back on in your own account is the $560,000. Where did that price come from? If it came from the agent's $5,100 rent roll times some multiple the market was using, then you priced the building off income and the appraisal priced it off condition, and the $489,000 was the market telling you three original kitchens are worth about $70,000 of somebody's renovation budget. Your fix list is fine. It wouldn't have moved this number.