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Lowball Appraisal on FHA Financed Sale

first posted: 2020-11-28 07:39:55.097805

One of my tenants gave notice in August. I had to decide whether to find another tenant or sell.


Background and Numbers

The 1800sqft Dallas TX suburban house was purchased for 120k in 2014 and is now worth 220k. The local tax has increased with value to reach 5k with insurance cost at 1k. Local tax is quickly eroding net yield and putting much stress to lease out the house on the landlord in case of vacancy.

Rent had only increased from 1240 to 1490 per month over this period. One would need to raise rent to 1800 (Zillow upper bound) to improve on the almost 5% cap rate to 8%. But my assumption was a 3-year tenancy, and the tenant is leaving after 1 year here.

Why Sell?

I decided to start reducing my exposure to US real estate and free up some cash for more agile investments. My thinking when I bought these houses is that I can easily double my money while receiving high rent, but there is no shortage of land in that area so that house prices are linked to construction value. So this house value is not going to 1 million like a San Francisco house where land is scarce.

This house does not have a granite countertop kitchen or hardwood floor, so it will never compare well with houses that can be built for 250k.I thought that it is simpler to get out when a tenant leaves and the house is in the 200k-300k price range before more big-ticket items (roof, foundations) crop up.

Zillow Offer vs MLS

Houses below the 250k price point are in very demand. I showed it to Zillow offers. They estimated it at 220k, but they would charge a 5% fee (similar to the 6% agents commission that would be paid) and a 15k repair cost to do various things and convert back to a garage the room that was converted from a garage.

Rather than let Zillow charge me for an expensive conversion, I decided to list the house with an agent on MLS at 210k in as-is condition. The house had several offers below and above bid. There was a cash offer below bid from an investor. The best offer was for 220k from the FHA borrower.

Competing offers: the FHA buyer

This is an FHA 203-B mortgage, with a borrowed amount of 212k, with a 1% rate over 30Y, and a 3.25% origination charger. Once borrowers can get this kind of financing with a monthly payment of just 681, we can expect that housing in popular areas will increase in price.

Indeed, all my houses increase at a 10% annual rate at the moment, whereas they return less than 5% cap rate. Those 203-B buyers are pushing the market up, and this time, it is not NINJA and liar's loan, but extremely affordable loans.

Conclusion : the leveraged buyer is an opportunity for the landlord

I decided to sell and my property manager and agent were very slow, so it was listed for Black Friday. Slow is good these days as the market is going up. Patience pays in a rising market.

With rates at 1% and credit being that available, you can expect 203-B financed homebuyers to price out rental investors. More areas will become unaffordable and new construction prices will increase as contractors will be in high demand.

There was a lot of uncertainty in August/September when I had to decide. I thought that mortgages were still at 3%. Now that buyer can finance at 1%, I am going to wait for the further appreciation to sell my other houses. Is the 203-B home-buyer the bane of the rental investor or their greater fool?

December 2020 update: the FHA appraisal comes back 10% below at 200k

My agent called me on Dec 10th as the FHA appraiser estimated the house at 200k, which is 10% below bid price. Unfortunately, the buyer does not have much cash to put towards the property, while the buyer and seller agent are ready to give 1k each from their commission to see the deal through.

If I decide to give up on this deal and sell later, I have to wait at least 6 month if I want to sell to a FHA financed buyer, the house having been appraised at 200k. Another possibility is to dispute the appraisal, which takes weeks and not always results in higher valuation according to the agent.

When contacted by the agent, the appraiser explained that the comp for my house were taken from another subdivision as the appraiser insisted to use 2 floor homes for comp. The agent thought the house is worse 210k at least, and 220k seems to be a possible market price given market tension. The broker said that some FHA appraisers seem to be lowballing those days in DFW.

We eventually decided to call of the deal and release the earnest money on Dec 16th. I had another offer that same day... with conventional financing and buyer willing to go ahead and pay with own cash if appraisal does not come for 210k.

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