Does A Bad Appraisal Equal A Bad Investment?

said on May 14th, 2009 categorized under: Financing

Hand mit Stift macht Häkchen auf einem KlemmbrettIs a duplex a bad investment if it doesn’t appraise for the price listed on a purchase agreement?

It depends on whether you’re the buyer or the seller.

With a flood of foreclosure properties dragging down property values overall, it isn’t altogether uncommon for a property not to appraise.

Even if many of these duplexes are selling for comparable prices to the one you’re buying, they may not be able to be used as comps; simply because they don’t have a recent rental history for an appraiser to use in an Income Approach to valuation.

So what happens when the property doesn’t appraise?

There are several possibilities.

First, the seller could reduce his price to reflect the value determined by the appraiser. Of course, this would benefit the buyer greatly.

The buyer or seller could also order another appraisal to disprove the first.

However, if the buyer intended to use FHA financing, there’s a problem. FHA appraisals now essentially follow a property for six months. So, even if another buyer comes along to purchase the property, there  is a record of the previous appraisal, which will prevent her from agreeing to a higher price.

On the other hand, if the buyer was using conventional financing with a 20-25 percent or more down payment, the low appraisal does not “follow” the property. In many cases, the lender, loan officer and Realtors involved may attempt to work with the appraiser to re-examine the value by providing additional comps.

If the value doesn’t change, the original lender may be unwilling to finance the purchase.

This does not prevent the buyer from ordering another appraisal, using a different lender, which may result in a more favorable outcome.

Of course, both the buyer and seller also have the option of simply walking away from the transaction.

Does the low appraisal mean the duplex is a bad investment?

As always, if the numbers work, and are in keeping with the buyer or seller’s financial goals, no.