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Real Estate Investing Strategy: Smashing Appraisal Challenges

Published on Tuesday - April 16, 2013

Appraisal challenges are still being blamed for holding some real estate investing companies back from more volume. While foreclosures and distressed sales provide appetizing discounts for real estate investors, they are wreaking havoc with appraisals around the nation, throwing a wrench in appraised values by throwing off comparables.

This is an issue especially highlighted in areas like Detroit, MI, where investors are finding that homes don’t even appraise. Then they find themselves losing a ton of money either by making poor investment choices or finding themselves stuck and looking for alternatives to re-capitalize. Some are claiming you can’t buy a $25k house in Detroit, fix it up and make any profit.

Non-profits are wading into the market in a big way, but are reportedly losing $20k plus a pop, even with the city kicking in $20k in incentives. Lenders aren’t buying appraisals and the issues are not only restricted to this area. It’s the same in parts of Florida, Pennsylvania and elsewhere too.

So, what’s the solution to the appraisal crisis?

Common sense underwriting and appraisal rules would seem to be the obvious answer, but let’s dive into this a little deeper.

Let’s revisit Detroit, where real estate investing companies are flipping 1 out of 3 houses as land contracts. This can work great, but not all investors are that liquid.

Then there’s Michigan, where a collection of non-profits has another plan being tested before rolling out nationwide. Their plan is to pool funds to prop up the market with mortgages. In other words, they are creating their own ‘lender’ with public and private funding to finance the sale of their rehabs.

Additionally, mortgage lending is looking more and more likely to begin loosening up with increasing velocity sooner rather than later. There may be some regulatory challenges but Fannie Mae already back to doing No Doc refinances with FHFA’s blessing. A new FICO survey shows lenders increasingly positive about the state of the housing market with stats revealing them the most optimistic in 3 years.

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