As I travel the nation, I find interesting nuances within different real estate markets. One of the most recent nuances I have come across is the fact that in some markets FHA is requiring two different appraisals before they will approve and fund the FHA loan.
Today, I am finding in some real estate markets that FHA underwriters are requiring two appraisals be done for every FHA loan request. The property that is being financed by an FHA loan in these markets is being reviewed by two different appraisers that are pulled randomly from a pool of appraisers.
If you have been in the real estate industry for any period of time, you know that most rehabbers will buy a property, fix it up, and sell it for less than the going After Repair Value in a buyers market, so they can sell their rehabbed property faster than that areas average days on market. They will not only do this to sell the property faster, but to make sure the property will appraise for that adjusted amount too, instead of for full retail. When rehabbers are selling rehabbed properties in a sellers market, they will not need to do this as readily as long as the appraisers are staying in line with the increasing local real estate market values.
So, how do the two appraisals for FHA loans impact rehabbers and wholesale investors? In most cases, the FHA appraisers are looking at what the property sold for originally with the rehabber and then they are comparing it to the new asking price. In most cases, they are asking the rehabber to justify the increase in asking price. Thus, many rehabbers are finding themselves offering itemized lists of all of the repairs they have done to the property to help justify the agreed upon purchase price.
An additional factor that many rehabbers are facing is that some of the appraisers that are being chosen in the random pool are not truly comparing apples to apples. Some of these appraisers are blending completely remodeled property values with distressed property values. These properties are completely different animals even though they might be located near the target property. After all how can you lump into the same group a property that is stripped of copper and anything else of value with one that has been completely rehabbed. It does happen and that is how some of these FHA appraisals are costing rehabbers money and time. In some cases, it is even costing them deals from closing due to FHA not financing them. It has also delayed closings and even cost rehabbers more money, if they request a third appraisal to be done to help justify the under contract amount with the retail buyer.
Rehabbers need to have their numbers even more dialed in these real estate markets than anywhere else, due to the random nature of the FHA appraisals. They need to have even more of a buffer built into each deal, so they can adjust their retail sales price as needed nd not lose profit. I have seen the two appraisal system requirement in the Salt Lake City Metro market and in the Baltimore Metro market. I am sure it is just a matter of time before it will hit more markets, if it has not already.
If nothing else, this will force wholesale investors and rehabbers to really dial in their numbers and make sure they have dotted their eyes and crossed their t’s. It will also force the hap hazard rehabbers out of the business, because they will not be doing enough work on the properties to help justify to the increased sales price.
It might offer enough problems that some rehabbers might consider getting around these issues by fixing up their properties, filling them up with tenants, getting property management in place, and then selling the property to another investor as a turnkey rental. Rehabbers will not have to deal with FHA underwriters random changes and requirements.