I am winding my way through the purchase of my first rental property. Already cleared the big hurdles of an accepted offer, a zoning variance, and a decent home inspection. When lo and behold, some appraiser has decided in my appraisal, that the building is not worth the contract price. My question is;
Who are these Devils and How do I stop them?
The bank has to cover their butt, I get that. But it seems to me that this appraiser is standing in the way of progress, of good business, of AMERICA!
The building in question has always vacillated between $130k and $150k through the last 2 sales of the property. I thought not only am I getting a great deal at $115,000 but of course it will appraise for that.
Apparently the appraiser had to go very far outside the area for comps and they came back at $109,000. Imagine my surprise.
Now I am left with the following options;
Agent gets new comps to combat low valuation (hard).
Seller lowers the price by $ 6,000 (mean)
I bring $6,000 more dollars to closing (yuck)
Start over with new lender (long)
Walk away (don’t want to)
Negotiate further with seller.
I know this seller does not want to take any more of a hit than the already low selling price. But, he did loose five (5, not a typo) prior deals because of the zoning issue that I eventually solved.
The nitty gritty is that there are 3 methods for determining worth;
- Sales Comparison Approach. No problem, got a $120,500 valuation. Comps were hard to find because this was a 2 unit residential zoned commercial in a small town (under 5,000 people). They had to scrape comps from far away.
Income Approach. Also no problem, scored $118,000 valuation. This method looks at what is coming in (in terms of rent) to value the building.
Cost Approach. Not done, left blank???
The first response from the bank was “I sent that screenshot to my Manager and he indicated that verbiage is very commonly used on all appraisals and might have been copy and pasted from template or other report, but that Sales Comparison approach is not used for property value, the Sales Cost Approach is used.”
Except my Cost Approach was blank.
The explanation for why the Income Approach approach was not good enough was that ‘this is a single family home to be owner occupied, so Income Approach is not appropriate‘ What? That is not true at all, you are charging me $600 for a Small Residential Income Property Appraisal.
Luckily Race Fans, I am tenacious, lawyer brained, and paranoid about getting ripped off. I wrote up a long, calm, cool, collected, fact based rebuttal of this appraisal. Sent it to the proper place and waited. This is the Art of The Complaint.
ONE WEEKEND LATER;
The appraiser did make a mistake when submitting the order and it should have been…$120k…Please let me know if the seller needs any communication that the delay was due to the appraiser’s mistake and nothing you are not providing.
Seems the ‘filed was locked up’ from the previous appraisal. They were using a template with fill in the blank answers, and being lazy. Also the bank was wrong, it is the Sales Comparison Approach which is preferred to determine value.
So We are Back on Track.
But, hear is what worries me. If I wasn’t a tenacious, lawyer brained, paranoid, what then? I would have gotten screwed? I feel like this happens to people all the time.
If you are not at least confident and detail orientated, the world will screw you. This bothers me.
More from the Rental Property series;