Trusted my own comps, paid 8k over, appraiser disagreed

Question

I ask the questions I'd have been embarrassed to ask out loud, so here's one with numbers.

Underwriting a house where I pulled six comps in a half mile radius, all sold in the last four months, all 3/2, all between 318k and 334k. I set ARV at 325k. Reno scope is paint, LVP throughout, kitchen counters and appliances, both bath vanities, exterior cleanup. I have it at 34k with a 15 percent contingency, so call it 39k. 70 percent of 325 is 227.5, minus 39 is 188.5k max offer.

The problem is that two of my six comps had finished basements and mine doesn't, and one was on a corner lot backing a park. When I strip those out my range collapses to 305k to 318k. That's a 10k to 20k ARV swing on a deal where my total margin was maybe 55k.

How do experienced people handle adjustments on comps at this level? I don't want to guess at basement value. And is there a point where you just pay an appraiser 500 dollars up front to tell you the ARV before you commit?

Rena Expert · Accepted Answer

Strip them. A comp with finished below-grade space against a subject with none is a different product, and on a 325k house the adjustment is large enough and uncertain enough that including it imports your own guess into the answer. Your 305k to 318k range from four clean comps is better information than a 318k to 334k range from six dirty ones.

What you do next depends on which end of that range you underwrite. Take 310k as ARV, not 325k. Now 70 percent is 217k, minus 39k of scope, and your max offer is 178k instead of 188.5k. That 10.5k is the entire content of the disagreement, and it's the difference between a deal and a break-even.

Paying for a pre-purchase appraisal is defensible on a deal where the range is this wide, though understand what you're buying. An appraiser gives you a supported opinion at a point in time on a subject-to-completion basis, and they need your full scope of work in writing to do it. If your scope changes, the number changes. Some investors instead ask two listing agents who actually sell in that subdivision what they'd put it on the market at finished, which costs nothing and tends to get you a straight number because those agents want the listing.

The more likely failure here isn't your ARV. It's your 34k scope. Counters, appliances, LVP throughout and two vanities on a house that's dated enough to need all of it usually also needs interior doors, hardware, light fixtures and a garage door that doesn't look forty years old, and buyers price the house on the parts you skipped. Your 15 percent contingency is thin for a first pass on a house you haven't opened a single cabinet in yet.

samantha_ruiz · Answer

The finished basement thing is exactly where I've gotten burned. Below-grade finished space doesn't count in gross living area in most appraisal work, it gets treated separately, and the dollar adjustment an appraiser makes for it is usually way smaller than what the sale price difference suggests. So those two comps might be less distorted than you think. But you still shouldn't be using them as your top of range.

gregpowell66 · Answer

Seconding the scope point. From the build side, LVP "throughout" on 1,400 square feet at 4 to 5 a foot installed is 6k right there, and that's before you find out the subfloor has a soft spot near the tub. If your 34k didn't carry a line for subfloor patching you don't have a 34k scope, you have a hope.

Also, corner lot backing a park is a real premium in a lot of neighborhoods and you were right to pull it.

joe_delgado5 · Answer

I've stopped setting ARV as one number. I carry a low and a high and I make the offer work at the low. If it only works at the high, I'm not underwriting, I'm rooting for something.

178k vs 188.5k though. In my market a 10k difference means someone else buys it. That's the part that never gets solved, you just get comfortable losing deals to people who'll find out later.

Trusted my own comps, paid 8k over, appraiser disagreed

4 replies