O appraisal, where art thou?
When Ashley and I did our first flip in 2012, the property was located on Atlas Way in Calhoun. It was a three bedroom, two bath brick ranch that we bought at a foreclosure auction for $19,178. That number sticks out in my mind because it was the biggest purchase I had ever made at the time. It was also the biggest cashier’s check I had ever seen. Do remember, we were two broke kids right out of school who came from poor backgrounds. And a check for $20,000 might as well have been a million dollars to us. And when we won the auction, I was both scared and exhilarated at the same time. Things were about to get real, and our investing dreams were about to come true.
That house was in pretty good shape when we bought it. We did a semi-minor rehab on it with paint, floor coverings and fixtures making up most of what needed to be done. But because I was physically doing the rehab, we were able to do some upgrades like tile back splashes and new windows. Our total rehab cost was around $15,000.
We put it on market and got it under contract in a few weeks for $70,000. And then we held our breath, hoping the house would appraise for that amount.
It did appraise. And we breathed a sigh of relief!
Oh, how times have changed.
For one, we just about spend more than $15,000 on rental rehab these days. The price of materials is astronomically high in comparison to just last year. And labor costs are up, too. Just to give you an idea, our last big rehab cost 40% more than we projected when we bought it.
House prices are also very high, and so is the demand for them. And it is making things very interesting. For instance, it took us three weeks to get a contract on Atlas Way. The house we listed last weekend had 10 full and over-list-price offers by Monday morning.
You would think this situation would be great. But we just had something happen that hasn’t happened to us in years. One of our properties did not appraise for the contract purchase price.
That got my attention.
You see, there are two sides to the fair market value of a property. The first is what a reasonable person is willing to pay for a property on the open market, which is literally the definition of fair market value. The other side is the current appraised value, which is what the bank uses to determine if the house is worth the loan the buyers are seeking to obtain.
As long as those two values are in relative harmony, house sales go smoothly because banks loan so that people can buy. But it seems we are at a point where the two values are not in harmony.
After that house didn’t appraise, I called my friend Phillip to pick his brain. He is one of the best appraisers around, and I told him about what we had going on with our house and that it had been a multiple-offer situation and had gone under contract for over list price. I then asked him if our house not appraising was a fluke or a sign in the market that I needed to pay attention too.
He told me that in 30 years of appraising he has never seen a market like this. Values are very high, but overzealous buyers are driving contract prices higher because there are so few properties available to buy. Regularly, he is seeing offers of $30,000 more than listing prices, and he can’t justify those values to banks. He said he and his team have been working longer hours, sifting through sales and looking at data trying to get close, but it is just not happening.
I asked him what happens if a house doesn’t appraise. He said he has seen some buyers bring cash to closing to make up the difference. (This is not smart in my opinion. Bringing cash to overpay for a house means the buyer is under water, and if the market changes that situation will get them into trouble.)
But at the end of the day, it looks like buyers are throwing out these crazy high offers just so they can get homes under contract and then renegotiate once the appraisal comes back. So, just be aware that if you get an awesome, over-list offer on your house, don’t count on that extra money yet. You’re going to have to wait and see if it will appraise for that value.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.