9. BRRRR Strategy vs. Desktop Appraisal
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
I recently helped a group of fellow investors purchase a small portfolio of rental properties with a per door price of $70K here in Birmingham. During the appraisals, I receive a call from the seller, who I know. “A real estate agent showed up and is only taking photos of the property and frankly he is not doing a good job. He didn’t take photos of all the rooms.”
This often is the case with a desktop appraisal. The lender hires a third-party service to perform remote value analysis, provide comparables and appraisal value. This third-party service then hires a local agent to take photos for about $20 per property often of bad quality with many areas of the property excluded. The cost to you for this desktop appraisal is about $150-$200, a significant savings from a full appraisal of $450+.
When the desktop appraisals arrived, more than half appraised under $55K. How did this happen?
The desktop appraisal did not discount distressed properties (REO’s, cash sales, fixer uppers, etc.) in the search results algorithm. By including these properties in the comparables significantly reduced the values.
I suggested to the client and the lender they do full in-person appraisals. The lender realized its mistakes and even agreed to pay for half of the appraisal cost. It is a large loan and lender did not want to lose it.
Most of the time this does not occur. You would have to contest the appraisal by submitting a reconsideration of value document to the lender. You will outline your reasons and any additional comps supporting your opinion of the value. The lender sends the reconsideration to the appraiser for review. Rarely will the appraiser revise the value. Ultimately, the lender accepts the final value opinion from the appraiser. You either accept it, decline it or the lender rejects the loan (if it falls below their minimum loan amount).
PRO TIP: When you agree on your term sheet, make sure to tell your lender you want a full in-person appraisal. It will cost more but well worth it to avoid unnecessary surprises.
And what about the new appraisals? They all came back between $70K-$75K.
Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email jonathan@reitrader.com
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