Have you ever found yourself falling short on the “subject-to” value, commonly known as after-repair value (ARV), on your appraisal report for a fix-and-flip or fix-and-hold property? As a loan officer, I've witnessed this exact scenario too often. At times, investors are left perplexed after their realtors send them recently sold properties—comparables that clearly justify the subject property’s ARV, yet none of these ARV comps end up on the appraisal report. This often leads to investors criticizing the appraiser or using colorful language to express their frustration; however, such an approach won't yield positive results with the appraiser. If you’re a pro, you likely even provided the licensedappraiser with several as-is value and ARV comps for safe measure.
So, why do many investors fall short on their ARVs? Well, multiple variables play a contributing factor. Perhaps the comps you initially received simply aren't supported, leading to a deal that doesn’t make financial sense to continue. For instance, your realtor might have provided comps that are further away from the subject property than the appraiser was willing to use. Typically, appraisers aim to find comps within a one-mile radius of the subject property.
Appraisal reports act as crucial checks and balances, safeguarding you from entering into a potentially unfavorable investment. That's why they are one of the most critical components for underwriting your deals. However, the mistakes often made by investors can lead to an inaccurate ARV, primarily stemming from their scope of work that may lack important details.
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Here are four tips to ensure an accurate ARV:
1.Itemized Budgets: Your scope of work, or budget, must be impeccably detailed. I've seen investors present non-itemized budgets, such as "Kitchen: $20,000," which lacks specifics. Instead, provide a comprehensive breakdown of each area under renovation, specifying components like kitchen: $20,000 - white plywood shaker cabinets, quartz countertops, 27-inch long 9-inch-deep stainless-steel sink with garbage disposal, herringbone subway tile backsplash, new laminate wood flooring, recessed lighting, new GFCI outlets, black hardware, and fixture finishes, etc. This detailed breakdown vividly represents the finished product for the appraiser and should be displayed throughout the entire scope of work for each line item. Pro Tip – allocate at least 10% of your budget as a contingency for unforeseen expenses that we all know are inevitable.
2.Visual Aids: I strongly recommend dedicating a separate page in the scope of work for images showcasing proposed upgrades and materials. This approach ensures that the appraiser visualizes the property's upgrades and aligns their assessment with your scope of work.
3. Floor Plans: Document any changes to the bedroom and bathroom counts, structural changes such as removing walls for an open floor plan or adding of square footage. While your lender will probably request proposed floor plans, it's crucial to confirm that the appraiser is aware of these changes, as they will significantly impact the property's future value. If you are altering the property’s structure, especially adding square footage, your lender will likely require plans from a licensed architect to submit to the appraiser and for the lender’s underwriting team.
4. Write It Down: Summarize the itemized budget and the steps you plan to take to improve the property’s appearance. While it may feel repetitive, this detailed information is valuable for the appraiser. Providing comprehensive descriptions showcases professionalism and attention to detail, ensuring a more accurate appraisal report.
Not every deal is a “deal”, which is why we do our homework to verify the numbers. But, by implementing these steps, it places you in the best position to ensure you receive the most accurate ARV for the property. Collaborating with your general contractor on the scope of work is crucial. Attached is a downloadable scope of work template—a valuable guide for both you and your contractor to align on project details. Working on this together ensures clarity and mutual understanding. Comprehensive details, clear visual aids, and explicit documentation of changes are key to securing an appraisal report that accurately reflects the property's future worth.
Remember, even after taking all these steps, if you believe the appraiser has missed essential information or a specific comp, you have the right to request a reconsideration of value. Seek assistance from your realtor and broker/lender to assure accuracy and that you are using factual data in the reconsideration process. If all else fails and you still fall short on your ARV, before you walk away with your earnest money deposit, submit for a price reduction to the sellers to compensate for the low ARV. Pro Tip – always make sure your realtor or attorney adds into your offers that the contract is contingent upon the appraisal report including as-is value and subject-to value when the purpose is to renovate. Your earnest money deposit will thank you for this.
Happy investing!
