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This week\u2019s question comes from Mantas<\/strong><\/a> on the Real Estate Rookie Facebook Group<\/strong>. Mantas is asking: My buddy placed an offer substantially above asking price and the seller, before accepting the offer, asked my friend if he would pay the difference if the appraisal came in lower than the offer.<\/strong> Anyone encountered this situation and what would be the best response if any?<\/p>\n Ah, the classic appraisal gap<\/strong><\/a>\/appraisal contingency<\/strong>. During hot housing markets (like we\u2019ve been experiencing over the past two years), these types of offers have become more and more common<\/strong>. A seller wants to be sure that they can get the sales price they want and the buyer often has to pay the price to cover the appraisal difference<\/strong>. But what are some ways to get around this if your appraisal comes back low<\/strong>?<\/p>\n If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group<\/a>! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).<\/p>\n Ashley: Ashley: Tony: Tony: Ashley: Ashley: Tony: Tony: Tony: Ashley: Ashley: Ashley: \u00a0<\/p>\n<\/div>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n
This is Real Estate Rookie Episode 198.<\/p>\n
My name is Ashley Kehr, and I\u2019m here with my co-host Tony Robinson.<\/p>\n
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information, and answers to your questions to help you kickstart your real estate investing journey. And today we\u2019ve got a really cool question coming in from the Real Estate Rookie Facebook group, and if you guys are not in the Real estate Rookie Facebook group, make sure you join. It is honestly one of the most active, the most engaged Facebook groups that I\u2019ve seen for real estate investing.<\/p>\n
Today\u2019s question comes from Montes Receivus, so Montes, hopefully I said your last name the right way, but Monte\u2019s question is, \u201cSo my friend just encountered this situation I\u2019ve never heard of before. My buddy placed an offer substantially above asking price, and the seller, before accepting the offer, asked my friend if he would be willing to pay the difference if the appraisal came in lower than the offer price. Very ballsy question. Has anyone encountered the situation before, and what would be the best response, if any?\u201d So Ash, what are your thoughts on this?<\/p>\n
Yeah, so an appraisal, it\u2019s so tricky, and Tony, I\u2019ve heard you mention this before about how it\u2019s more of an art than a science, and I think that\u2019s such a great advice because you can\u2019t say for sure exactly what a property is going to appraise for even if you look at the comps or you look at what income it is bringing in. So this buddy, what they\u2019re saying could happen, it definitely could happen where there could be a difference in the appraisal. So a couple things I do are do as much research as you can ahead of time as to try your best to estimate what the actual appraisal is going to be. So one thing I do is pull up the comps. I use Prop Stream. You can go to your county GIS mapping system and look at properties. You can also just go to a MLS listing website like Realtor or Zillow and pull up the comps from there. And then go ahead and look at what are some differences between those comps, too. Maybe one property has a garage, one doesn\u2019t, kind of take those into your measurements there.<\/p>\n
Then when you meet the appraiser, bring all the information you have. So if there was a new roof put on, there was upgrades done to the property, bring that with you. Maybe if you own property down the road, or you know somebody who does, and they had an appraisal done, and it works in your favor, bring a copy of that appraisal. So it goes both ways. Some appraisers will take as much information as you can give them and say, \u201cOh wow, thank you. This is going to make my job so much easier.\u201d Some will be like, \u201cNope. No thanks. I don\u2019t want to even look at it.\u201d But might as well be prepared if it\u2019s somebody that\u2019s going to take the information that you want. As far as the appraisal coming back lower than you want it to, I don\u2019t personally have any experience, and that\u2019s why I\u2019m going to turn it over to Tony. So my little tips were just to help you get prepared for the appraisal, and now Tony\u2019s going to actually help you with what happens when the appraisal does not come back how you want it.<\/p>\n
Yeah. And Ashley, all fantastic points. I appreciate you sharing that with the listeners, and Montes, to kind of go back to your initial question as well, it actually isn\u2019t that crazy for a seller to ask that of a buyer. So it is common that if there\u2019s kind of this bidding war situation going on, that the purchase price exceeds what the property will appraise for, and there\u2019s a name for that. It\u2019s called the appraisal gap. And we saw a lot of this happening over the last 12 months as the market went bonkers, and there was multiple offers, multiple bidding, people bidding on the same property. You saw a lot where the properties were getting placed under contract for a price that was potentially significantly higher than what the property would appraise for. So in a market like this, Montes, it is common. It\u2019s not that crazy the seller to ask that from the seller.<\/p>\n
And a lot of buyers, when they\u2019re submitting offers in a competitive market, they\u2019ll even include in their initial offer what appraisal gap they feel that they\u2019d be willing to, they\u2019d be willing to go up to, but say that you feel that the appraisal just came in low, right? Not necessarily that you went way over what it was valued at. If you feel that it came in low, you can challenge an appraisal. Okay? We have you successfully challenged a few appraisals, and what we were able to point out was some discrepancies in the report that the appraiser put together. So for example, one that we just did, the appraiser had the square footage off by, I think, almost 200 square feet, right? And that makes a difference in what the value of the property is. The comps that the appraiser chose, we found other more similar properties, better comps, and the same mile radius that the appraiser used that he just overlooked for whatever reason.<\/p>\n
So find holes in the appraiser\u2019s report that you can point to say, \u201cHey, here\u2019s an inconsistency here. Or here\u2019s an inconsistency here. Or here\u2019s a better appraisal comp here, or here is some information that was incorrect.\u201d And if you can push back, sometimes the appraiser will admit and make those changes, other times I\u2019ve had it to where you can actually get a second appraisal ordered, and then if all else fails, maybe it\u2019s just about finding a different lender, right? If the lender isn\u2019t willing to jump through those hoops to help you fight that appraisal, you can always go out, find a different lender, they\u2019ll be able to reorder another appraiser. They\u2019ll be able to order another appraisal from another appraiser which will help you hopefully get a better opinion of the value of the property. So that\u2019s what we\u2019ve done in the past to help us get around some of these appraisal gaps that we\u2019ve seen. But all else fails, you might, Montes, your friend might just have to come out of pocket to actually cover the difference between the purchase price and the appraisal price.<\/p>\n
Yeah. And I think the thing to take away from this episode is to at least try to dispute that appraisal if that does happen, where there is that gap, the difference. Do what you can to try to get a new appraisal or have the appraiser re-look at his configuration and what he computed as the appraised value.<\/p>\n
Well, thank you guys so much for joining us for this episode of Real Estate Rookie. You guys can send us a DM on Instagram or leave a message in the Real Estate Rookie Facebook group. And if you guys are enjoying the show, please leave us a five star review on your favorite podcast platform.<\/p>\n
I\u2019m Ashley at Wealth from Rentals and he\u2019s Tony at Tony J. Robinson. Thank you guys so much for listening.<\/p>\n