I'm going to teach you how to get better appraisals. Let me start off by saying that I have lost hundreds of thousands of dollars in appraisals. Some of them have been justified, others not so much. Let me explain what exactly an appraisal is. 

Anytime a buyer is getting a loan on a property, they must also get an appraisal. An appraisal is done by a third party company that is not associated with the mortgage company. They are to give the fair market value of what the property is worth. Their appraisal has drastic consequences on the deal. If you're under contract for $100,000 and they say the property is worth $100,000, then you're good. There won’t be issues. You have issues when they say that the property is worth $90,000. Now you have a $10,000 gap and how to fill that gap is always up for negotiation.

Ideally as the seller you'd want the buyer to pay another $10,000, but many times the buyer can't do that. For them to do it they'd have to come up with an extra $10,000 in cash because the lender's only going to give a loan based on $90,000. If you want to pay$100,000 for it, you can, but it's coming out of your pocket. Most buyers only have the down payment that's required of them. 

So if they were trying to buy this home for $100,000 and they were using a 3.5% down FHA loan, they only had $3,500 to buy this home. They still need that $3,500, but now they need to come up with an extra $10,000 if they want the home. For most FHA buyers, that is not reasonable. They only have that 3.5%.

So in that scenario, you, as the seller have to make a decision, you can do one of four things. 

1. Appeal the appraisal

This is typically what we do. We are going to appeal to the appraisers to show why we think they got the value wrong. When that happens they're going to want to see comps and we essentially have to prove the value. Then they're going to make a decision. 

2. We drop the price

It's just a matter of the buyer having no extra down payment. Your option is just to go down to that $90,000 appraisal eat the $10,000 loss. You can try to get agents to cut commissions so that everyone shares in the loss but this is the worst case scenario. You're just taking the whole $10,000 loss by yourself. I've had to do that many times because in the end, it's better to just sell the property, move on, get onto the next property. 

3. Negotiate

Ideally, your buyer would come up to $100,000. That is what you guys contractually agree to and what I always push for. If we can't get it, then hopefully we can meet somewhere in the middle. Maybe we'll meet at $95,000. Now the buyer has to come up with 5,000 extra down. I'm going to lose $5,000 from what I thought I was getting.

You've got to remember, for the buyer itt sucks coming up with a down payment, but they are getting the home for cheaper than what they thought. So don't feel super bad for the buyer getting a low appraisal. If you end up selling it to them for less, because of that, they won.

4. Cancel the agreement

You're going to cancel, put it back on the market and hope that you get a new buyer and you get a better appraisal this time around. We've gotten appraisals where they were $20,000 or  $30,000 less than our contracted price. At that point, even after the appeal, the gap was too great to try and make a deal. In most cases, if we have a small gap, like $10,000, we're usually going to find a way to make a deal. The agents, the buyers, us, we all want to see it through. We don't want to put it back on the market and get a new buyer. The buyer doesn't want to go try to buy a new house. So it's in everyone's best interest to try and make it work. 

But when the gap is huge, there's nothing you can do. You gotta just cancel the agreement and move on.

Now, I just covered what happens when you get a low appraisal, but the whole point of this is to go over how to prevent that from happening. We take a ton of preventative measures to make sure we get the very best appraisals, so we don't have to do that. 

It is inevitable that you will get low appraisals, but the more of them you can prevent the more profit you're going to make. So here are some ways that we get the best appraisals possible. 

1. Build rapport with the appraiser

Just like with anyone you're negotiating with, whether it be a seller, whether it be a contractor, whether it be anyone in the industry, you want to build rapport with them. If you build rapport and you are vibing, clicking, they're more likely going to give you a better appraisal. It's human nature. 

I actually learned this in baseball. I compare appraisers to umpires. Umpires are a neutral third party, and they're just trying to do their job and judge a game fairly. Appraisers are the same way, they don't work for the buyer or the seller. They're a neutral third party trying to give you a fair value for the property, but both umpires and appraisers are humans. I can tell you I've built rapport with many umpires. Many of them are my friends, and when there was a call that could go either way. It usually went in my favor because we had a built report. So do the same with appraisers. 

2. Send them a list of improvements and the comps

So for the list of improvements on our flips, we will literally write down everything we did. We will do it item by item. They'll go through every room and say, “we did a brand new kitchen, new quartz countertops, new cabinets, new handles, new sink, new faucet, new appliances. The bedrooms we've got new doors, new door handles, new paint, new baseboards, new flooring, new closet doors, new light fixtures” etc. 

Basically, I want to give everything value and make sure they know for certain that everything in this house is new so they can justify all of the new value. On top of that, I'm going to give them a list of comps. Now with the list of comps, if you have properties that have already sold for the price you're under contract for, it makes it very easy. These justify the property, these justify our contracted price. Typically I never really have an issue when there's tons of comps that support it. 

Now, when you don't have comps that support it, maybe you are above the comps. That's when you have to get creative with them. You would say, “We're $10,000 above this property, but we have these upgrades that make us $10,000 more valuable. They didn't have a new kitchen. We do. They're on a main street, we're not.” You can even use market conditions to push your value up. Something like, “when that property sold, it was during the pandemic. Now we have very tight supply. There's nothing for sale. We have multiple offers on the property. This is worth 10,000 more.” 

These things make a difference. They will take market conditions into an appraisal consideration, but you need to ask for it. They may not think about it. These guys do so many appraisals every day. Don't assume that they're going todo everything right. You have to give it to them on a platter so they don't mess it up. 

3. Meet them at the house

I know a lot of flippers that will personally meet the appraiser at the house. When they meet them at the house, they're doing all the things I just described. They're building rapport, handing them a list of improvements, giving them comps, personally going to walk them through the house.

They're going to do everything in their power to justify the price.

We don't do that anymore. We don't usually have too much of a problem with appraisers. With all the three things I described before this it's usually enough. But if I had a luxury flip, I would be certain to go meet the appraiser. There's too much on the line and too much variance in the luxury sector. A model match might sell for $1.2 million and you're trying to get $1.6 million. You better meet the appraiser to go and justify why you're that much higher. When you're doing entry level like myself, it's typically not an issue. You've got a lot of comps to justify what you're selling it for. So if the stakes are high or maybe you only got one flip going on, definitely go meet them at the house.

The way you can do that is by changing the listing to saying appointment, only call the listing agent. If you have it on a lockbox, they'll just go without telling you. But if you change it to an appointment, they have to call in and then you can schedule a time to meet them. So there's a quick little tip that most people don't know. 

4. If all things are being equal, I'm always taking a VA loan

Here's why. Number one, obviously I love the veterans. My father-in-law was in the air force for over 20 years. My grandpa was in the military and I love working with people who've been in the military. They do a ton for our country and I love my country. But there's a second reason why I love taking their offer more. You're more likely to get a better appraisal with them.

It goes back to human nature. On a VA loan, if they do not appraise, there is something that happens called Tidewater. I don't know the exact details of what it is and how it works, but what I do know is if they don't appraise it at value, they have to give much more explanation on why they don't appraise. With an FHA loan or conventional loan they do not have to explain it the way they have to explain it for a VA loan. 

So naturally, what is a human going todo? If they can find a way to give it the appraised value they're just going to because they don't want to do extra work. So all things being equal, you should take a VA loan over other types of loans.

Those are the tips on how to get your best appraisal.