BRRRR appraisal came in low? What to do next
By Austin Frangoules | Updated | 7 min read
A low appraisal on a BRRRR refi shrinks the new loan, so more of your cash stays in the deal. First measure the damage, then pick a move: challenge the value with better comps, wait for seasoning, switch lenders or loan types, or accept a smaller cash-out and keep the rental.
Why a low appraisal hurts a BRRRR so much
A cash-out refi is sized as a percent of the appraised value. Every dollar the appraisal comes in under your ARV comes off the loan at that percent, and the loan is what pays back your purchase loan and your cash. On a flip, a low appraisal is the buyer's problem. On a BRRRR, it is yours.
- ARV you planned on
- $250,000
- Planned loan, 75%
- $187,500
- Appraisal
- $230,000
- New loan, 75%
- $172,500
The rent did not change, so if your DSCR was tight, the smaller loan may actually help the ratio. Your cash-on-cash return falls because more of your money is in.
Step 1: Read the appraisal before you react
- Check the facts. Square footage, bedrooms, baths, lot, garage and condition. A missed bathroom or the wrong living area can move value by thousands.
- Check the comps. Were they renovated like yours? Inside your neighborhood? Recent? An appraiser using dated or distressed sales will land low.
- Check the condition rating. If your rehab was a full renovation and the report reads as average condition, the adjustments will be off.
- Check the date. In a rising market, comps from six or more months ago may need a time adjustment.
Step 2: Challenge it the right way
You cannot call the appraiser yourself. Ask your loan officer for a reconsideration of value, sometimes called an ROV. It is a formal request through the lender with facts the appraiser may have missed.
- Give factual corrections first, with proof: a survey, permits, the listing sheet or photos.
- Offer three or so better comps: closed, arm's-length sales of renovated homes nearby, as recent as possible. Explain briefly why each is closer to your house than the ones used. See how to read comps.
- Include your scope of work and receipts for the big items, like roof, HVAC, kitchen and baths.
- Keep it polite and factual. The appraiser has to justify any change in writing.
Step 3: Pick your next move
| Move | When it fits | Trade-off |
|---|---|---|
| Accept the smaller loan | The rent still cash flows and you can live with more cash in | Lower cash-on-cash; cash tied up longer |
| Ask for a reconsideration | There are factual errors or better comps | Takes time; often no change |
| Try another lender | The program allows a new appraisal with a new lender | New appraisal fee, new underwriting, no guarantee |
| Wait and refi later | New sales will support the value soon, or you are inside a seasoning window | Hard money interest keeps running |
| Change the loan type | A different program uses a higher LTV or a different value basis | Rate, fees or prepayment terms may be worse |
| Rate and term refi only | You just need out of the hard money loan | Little or no cash back |
| Sell it | The rental does not work at the lower value | Selling costs; you give up the long-term hold |
Do not forget the hard money clock
Waiting is not free. On a $160,000 hard money balance at 11%, interest is about $1,467 a month. Weigh a better appraisal in two months against roughly $2,900 more interest, plus any extension fee if your term ends. The hard money loan calculator shows the monthly cost for your terms.
How to avoid it next time
- Underwrite to a conservative ARV. Use a range, and plan the refi off the lower half of it.
- Stress test the refi. In the app, the appraisal stress test shows cash left in at ARV minus 5% and minus 10%.
- Mind seasoning. Inside six months, many lenders size the loan from your cost, not the appraisal. Read DSCR refi seasoning by lender type.
- Hand the appraiser a clean packet. Scope of work, permits, before and after photos, and a short comp list.
Questions
Can I order a second appraisal for my refi?
Usually not with the same lender for the same loan, unless the lender's own review calls for it. Another lender can order a new appraisal for a new application, at a new fee.
How much cash does a low appraisal leave in the deal?
The shortfall times the loan to value. A $20,000 miss at 75% LTV leaves $15,000 more of your cash in the deal.
Will a low appraisal hurt my DSCR?
Usually not. A smaller loan has a smaller payment, so DSCR often improves. The pain shows up in cash left in and cash-on-cash.
For education only. Not legal, tax, lending or investment advice. Loan programs and guidelines change and vary by lender; confirm current terms with your lender.