Sour investment due to inflated appraisal - Posted by Edwin

Real Estate Investing Single-Family Homes
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Posted by Edwin on April 16, 2011 at 19:16:08:

They should get less than agreed upon on the theory that they had a hand in the inflated appraisal that led to the investment in the first place. They chose the appraiser, they reviewed the appraisal, which means they could have caught any errors and had them corrected. They could have done some due diligence. I am not blaming them 100%, which is why I’m not suggesting they take all of the loss.

Part of a banker’s job-especially when it comes to spec project loans-- is to reel in overzealous investors when necessary and tell them their project just doesn’t make any sense. Clearly, it is not easy know when to do this, because I’m sure there are many examples of successful projects that got financed that were originally turned down by a “too conservative” banker. Darned if you do, Darned if you don’t.

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Sour investment due to inflated appraisal - Posted by Edwin

Posted by Edwin on April 11, 2011 at 01:04:01:

I?ve gotten myself into a jam and want to see if anyone has any ideas.

In 2005 I invested $528,000 cash into a rehab property, and got a bank loan for $811,000. Before lending, bank got an appraisal that said the property would be worth $2 million upon completion. Based upon this appraisal, I moved forward. Got the rehab completed as planned and everything?s beautiful. Listed the property for sale at the bank?s appraisal of $2 million, but no takers. Last May the bank got an updated appraisal that said the value was $1.7 million. Okay, so the economy tanked some… the lower appraisal is somewhat understandable. Dropped the price to $1.5 million?. Still no takers.

Price is now $1,350,000. IF it sells for this amount, bank will be paid off in full, and I?ll be left with $11,000, which will be completely wiped out by my carrying costs of about $140,000. So, bank gets paid in full, and I get stuck with a $130,000 loss. Doesn’t quite seem fair.

Clearly, I?m wondering how the initial appraisal could have been so wrong. And while the subsequent appraisal was closer to reality, it was still way high.

Question: Since the lender chose the appraiser both times, is it fair to expect the lender to share some of the loss? Isn?t a lender supposed to review the appraisal and deny the loan if they think the appraisal is unrealistically high? And if they didn?t deny the loan (which would have prevented this mess), aren?t they culpable for at least some, if not all of the loss?

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Re: Sour investment due to inflated appraisal - Posted by John Hyre

Posted by John Hyre on April 26, 2011 at 09:18:07:

“Question: Since the lender chose the appraiser both times, is it fair to expect the lender to share some of the loss? Isn?t a lender supposed to review the appraisal and deny the loan if they think the appraisal is unrealistically high? And if they didn?t deny the loan (which would have prevented this mess), aren?t they culpable for at least some, if not all of the loss?”

It has happened that banks have backed off on a loan due to issues such as the one you describe - but it strikes me as very much the exception, something that would be very unlikely to succeed in court, and very difficult and likely expensive to push in court. If you stop paying, the chances that the bank will short-sale, modify the loan, etc go way up, but at the cost of ruining your credit.

The larger question of “is it fair…”, I would say “no”. The bank made a loan it expected you to pay back, and you agreed to pay it back, there were no exceptions for “unless your appraiser was wrong”. The bank would not have received any “upside” had you made a profit, so it is reasonable to say that they should not be expected to share in the downside. The purpose of the appraisal was to protect the bank, not you…for that you’d have needed your own appraisal, as opposed to relying on theirs.

I certainly sympathize, I hate to see people getting shellacked in this economy. However, harsh as it may sound, it is not someone else’s fault or risk. You took the risk, and like an awful lot of people, did not see the writing on the wall. Whether that is your fault, it is certainly your responsibility, and certainly not the bank’s fault or responsibility. The unfortunate ethic of “blame someone else” is killing this country.

I am sorry for your financial loss. I hope you end up selling with a minimum of damage. And I hope you learn from it, become better, and successfully invest and make money in the future. Pain and loss are powerful feedback mechanisms, trust me, I know from experience!

John Hyre

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NOT DEALING WITH REALITY - Posted by DR PHIL

Posted by DR PHIL on April 17, 2011 at 16:55:45:

DENIAL!

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Re: Sour investment due to inflated appraisal - Posted by Tony Colella

Posted by Tony Colella on April 13, 2011 at 11:46:37:

This position of bank liability for high appriasals has been talked about more and more of late.

I have to believe that anyone investing with experience and I would expect someone who put over 1/2 a million of their own cash into a deal, would rely solely upon their own due diligence.

No one cares about your money or property more than you do, thus the reason we need to be the ones who determine value, not some appraiser. The appraiser owed us nothing, although we do pay for their services which seems contrary to common sense though I digress.

The investor gets burned by lack of due diligence or mistakes made therein. There is no one to blame but ourselves when we fail at this.

When we make more than expected it is a blessing but when we get hurt I don’t believe we can blame others for our mistake, at least on the micro scale. Now I would entertain any number of arguments placing blame on the macro economic scale, but an appraisal by the bank should not be one in my opinion.

I have done enough deals and I suspect you probably have as well to know that the appraisal is funny money. I don’t believe most appraisers would have paid what they valued a property to be worth, nor did I care what that number was.

I had to determine for myself what my exit strategies were and the more of them the better and safer the investment. I would only trust my own homework and be very conservative at that.

Yes, the macro economic downslide hurt many and is outside of our control and in my opinion outside the natural market which makes each action and effect anyone’s guess.

It is not easy to accept this and I know I have probably not made it any easier for you. In times like this many of us have had to cut some losses and even sell some of our better properties to shore up the portfolio. I do feel your pain and anger but for me the buck stops with me. The bank did not force me to make the decision to accept their money or buy that property. I have to face that reality and I afraid you may have to as well.

Tony Colella

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Re: Sour investment due to inflated appraisal - Posted by TableTurner

Posted by TableTurner on April 12, 2011 at 07:19:51:

Default and Tell them they do not have the legal standing to foreclose, Rent out the units, pocket your cash and move on to the next one.

TableTurner

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Re: Sour investment due to inflated appraisal - Posted by Ken

Posted by Ken on April 11, 2011 at 17:05:18:

If you sold it for $3 million and the bank asked for more than was due them how much would you have offered them?

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Wow! Ingratitude in BIG way - Posted by blakjak

Posted by blakjak on April 11, 2011 at 14:25:34:

We’ve most of us found ourselves in the same position so while we can sympathize with you, I’d guess 99% of us wouldn’t try to pass the blame onto a bank that made you the loan you wanted…based on an appraisal that was clearly favorable to you.

Did the bank know the econ was going to tank?

Obviously not and its hardly their fault Wall St and the feds cooperated in letting us die financially the last couple of years.

So now it’s time you grow up and take it like a man.

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Re: Sour investment due to inflated appraisal - Posted by Edwin

Posted by Edwin on April 16, 2011 at 19:01:54:

Thanks for the thoughts, Tony. I never thought an appraisal was ?funny money,? but my experience definitely proves that out. But if a person can?t rely on an appraisal, what good is it? An appraiser is supposed to rely on comparables and his/her experience and knowledge of the market to establish a value, and he should be able to defend his reasoning for setting that value. I?m not as experienced at appraising as the appraiser, so I think it?s a bit unreasonable to say the investor has to be the one to determine value. That?s one reason why an appraiser is used because he?s probably more qualified to establish value than a buyer or seller. He is supposed to have all the necessary training and skills to be competent. And in my situation, the appraiser?s main job was to make sure there would be enough equity for the bank to foreclose upon in case of default. Considering this, , he should have been particularly conservative, I would think.

Furthermore, I probably should have investigated and question the appraisal from the beginning. As an investor planning to sell, it is extremely important that the appraisal accurately reflect what an easily reachable sales price can be.

So, yes, I get burned for lack of due diligence, because I didn?t verify the so-called ?expert?s? valuation. What was I supposed to do? Get one or two more appraisals just to verify the first appraiser?s numbers? I also had a trusted partner in this deal who also thought there was sufficient value here. Clearly, he made a mistake as badly as the appraiser.

It appears there are two types of appraisals: One, to protect the bank and assure them of sufficient equity, and, two, an appraisal that serves the seller/investor and projects a reasonably achieved sales price. It’s clearly big a mistake to confuse the two!

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Re: Sour investment due to inflated appraisal - Posted by Edwin

Posted by Edwin on April 12, 2011 at 12:14:18:

Perhaps you’d like to explain why you think they don’t have legal standing to foreclose? I don’t do anything without an argument to explain my actions, but perhaps you can get through life doing otherwise?

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Re: Sour investment due to inflated appraisal - Posted by Edwin

Posted by Edwin on April 11, 2011 at 17:23:32:

what are you getting at? What’s the point of your question?

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Re: Wow! Ingratitude in BIG way - Posted by Edwin

Posted by Edwin on April 16, 2011 at 19:26:01:

First of all, I realize the economy tanked and this beef if not based on that. Secondly, the appraisal was at least 50% too high from the start. Not 5, 10,15% or a similar number that could be explained away by asserting that appraising is an art, not a science. I am willing to accept whatever blame belongs to me, but I think any rational person has to take a hard look at the appraisal and wonder how it could have been so incredibly wrong. And why the bank let it go through. Egg’s on their face, too.

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Re: Sour investment due to inflated appraisal - Posted by Natalie-VA

Posted by Natalie-VA on April 22, 2011 at 12:51:28:

You hit the nail on the head, Edwin. This appraiser was not working for you; he was working for the bank. Also, it sounds like he did his job of protecting the lender. They will probably come out whole plus all the interest money you’re paying them.

–Natalie

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Re: Sour investment due to inflated appraisal - Posted by Mark (SDCA)

Posted by Mark (SDCA) on April 18, 2011 at 17:01:39:

I have a few thoughts. You don’t give all the details of the deal so I will make some guesses.

  1. It sounds like this was a SFR. High end to VERY high end (depending on location). Limited buyer pool so limited comps so the appraisals may be way off. (Just take a look at zillow.com for example. The comps for some tract home in the middle of a stable neighborhood of 100 other homes just like it is very accurate. The comps for some ranch house WAY out yonder not so much. Your house is more like the latter.)

  2. 2005 is EONS ago in terms of appraisals. Things have changed MASSIVELY since then. maybe the appraisal was right, maybe it was wrong. But 100% irrelevant now. I have EASILY seen houses lose this much value and more.

  3. Appraisers were irrationally optimistic back then and irrationally pessimistic right now. IMO, the values are somewhere in between but the reality is: a house is worth whatever someone will pay for it. If no one is offering what you are asking, then the price is too high.

GL

Mark

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No winner here - Posted by Potash

Posted by Potash on April 18, 2011 at 20:45:40:

I do not see a winner in this epic debate

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Re: Sour investment due to inflated appraisal - Posted by Ken

Posted by Ken on April 15, 2011 at 22:22:07:

What I am saying is if you made more than expected and the bank asked for more than was due them you would tell them to f%$# off so why do you think they should accept less just because you will loose money.They should get back what they loaned plus agreed upon interest and you get to keep whatever you made over and above that,if you made a bad decision they should not have to suffer bacause of it

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Re: Wow! Ingratitude in BIG way - Posted by Chris in FL

Posted by Chris in FL on May 29, 2011 at 22:53:03:

Edwin,

You started with an appraisal for $2 million in 2005? Finished project and trying to sell now in 2011? Not sure about where you are at, but where I am at a $2 million property in 2005 might be worth less than $1 million today. RE has fallen that much. May have nothing to do with a bad appraisal at all. I own over 15 properties that have fallen dramatically in value, and probably 4 that I bought for twice their current value. Guess what - my tough luck. I make my payments, and my larger number of winners carry my few losers. Tons of people that bought in 2005-2006 took a beating because of value declines. Many in foreclosure. Your decision - suck it up, move on, and start making money now, or let it ruin your credit. At least you have a choice - so many right now don’t.

No offense, but the bank and the appraiser are not to blame. The economy and especially RE tanking - yeah, but that is life. Big numbers to lose, and sorry about that, but learn the lesson, and move on. I put $50K cash down on my personal residence in 2006, and now the house is still worth less than I owe on it… Oh well; glad I am able handle it, because many are not as fortunate as I am. What I am doing is building huge wealth in RE today, that in hindsight, will far eclipse any losses I have eaten!!! You ought to do the same (if you are able)!

I hope you don’t take this the wrong way!

Best wishes,
Chris in FL

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No teeth here - Posted by Dentist

Posted by Dentist on April 19, 2011 at 16:27:07:

n/t