Appraisal Comes In High? How to Make the Most of It

I recently had a client email me about an appraisal that came in high.

Seems like a champagne problem, right? Who wouldn’t want their appraisal to come in high?

But my client wasn’t sure what to do.

He had a duplex in Detroit that he had done a significant rehab on. When we had initially done our numbers on this project we were conservative with the estimated After Repair Value (ARV), expecting it would come in around $150,000.

But the appraisal actually came in high at $206,000! 😳

We always try to be cautious when running the numbers. And while we’re usually pretty spot on, sometimes appraisals come in higher or slightly lower.

And it’s always more fun to talk through options for an appraisal that comes in high.

My client called me, not knowing what to do. His concern was if he took the full loan-to-value (LTV) on the appraised value, he’d be left with very little cash flow.

This is where the decision gets tricky, and I think it’s something a lot of investors can relate to.

The Lump Sum vs. Cash Flow Dilemma

When I think about an appraisal that comes in high I liken it to choosing between taking a lump sum or monthly payments if you won the lottery.

Personally, I would always go for the lump sum because I believe I can take that money and reinvest it at a higher rate of return. Pulling out the maximum possible cash from the higher appraisal is like getting a head start—extra capital for the next investment to keep the BRRRR cycle moving.

But not everyone feels the same way.

Some people prefer having more perceived security and worry about taking on more debt if it means tightening their cash flow. This concern is valid—if cash flow brings you comfort, it might be better to keep the equity in the property and enjoy the stability of steady monthly income.

Ultimately, it comes down to personal preference. There’s no right or wrong answer—just what works best for your risk tolerance and investment goals.

But let’s look at some benefits as well as drawbacks to high appraisals.

Benefits To An Appraisal That Comes In High

A high appraisal can really help accelerate your real estate investing plans. I personally love it when appraisals comes in high.

Here are a few reasons why:

Increased Leverage

A higher appraisal allows you to borrow more against the property, giving you additional funds to reinvest into other deals or improvements.

This leverage can help you grow your portfolio faster without having to save for a new down payment.

So if you’re looking to scale a rental portfolio quickly, an appraisal that comes in high is a huge help!

Better Equity Position

With a high appraisal, you immediately have more equity. This can provide a safety cushion in case the market changes or you need to refinance again in the future.

Again, going back to my client, at a $150,000 appraised value and 70% LTV, he’d only have $45,000 in equity. 

But at a $206,000 appraised value and the same LTV he’s looking at $61,800 in equity.

Improved Loan Terms

A higher appraisal can improve your loan-to-value ratio, which may lead to better loan terms, such as lower interest rates or reduced private mortgage insurance (PMI) requirements.

For example, most of the lenders I work with will require a higher interest rate on loans under $100,000. When an appraisal comes in higher than expected, it could get you better loan terms.

Drawbacks To A High Appraisal

A high appraisal might sound like an automatic win, but there are some downsides to consider.

These potential downsides don’t personally bother me, but everyone has different preferences and comfort levels. And it’s worth recognizing the potentials drawbacks to a high appraisal.

Market Mismatch

Just because an appraisal comes in high doesn’t mean that’s what you’ll get if you decide to sell on the open market.

Appraisals are based on recent sales and market data, but the reality is that market conditions can change, and buyers might not be willing to pay that high value.

And in a market like Detroit where comparable sales can fluctuate wildly, you just never truly know what your property can sell for until you list it and see what buyers are willing to pay. There’s a good chance my client wouldn’t be able to sell his duplex for $206,000 on the open market.

As long as you understand that and are ok with it, I believe taking the higher appraisal is the right move.

Lower Cash Flow

A higher appraisal often means more potential borrowing, but it can also lead to lower cash flow if you decide to take out a larger loan.

This might be less appealing if steady cash flow is what keeps you comfortable in your investment.

But if you’re looking to scale and build a larger portfolio, this is going to have less impact on your decision to take the higher appraisal.

How To Ensure Your Appraisal Comes In High

Obviously, not every appraisal is going to come in high. In fact, sometimes they come in lower, which can be frustrating. And appealing a low appraisal is an entirely different article topic.

However, when an appraisal comes in high, it’s important to capitalize on the opportunities it creates. When you get a win like this, it’s worth taking a moment to understand why.

In a market like Detroit, it can simply come down to luck. Since comps can be all over the place, sometimes it simply comes down to getting the “right” appraiser for your property.

The best way to put yourself in for a positive appraisal surprise is to run your numbers conservatively from the start. Additionally, make strategic improvements that add value, like updating kitchens, bathrooms, and enhancing curb appeal, and provide thorough documentation of all rehab work, including before and after photos. 

The more you can show an appraiser that you’ve done work and made updates, the better your chances of getting a high appraisal.

Practical Considerations for Investors

If you find yourself in a situation like my client where your appraisal comes in high, here are a few factors to consider when deciding how much equity to pull out versus how much cash flow to keep:

• Risk Tolerance: Are you comfortable taking on more leverage? If the thought of lower cash flow stresses you out, then perhaps keeping more equity is the way to go.
• Opportunity Cost: What’s the potential of reinvesting that cash elsewhere? If you can put that money into another property that will provide a strong return, it might be worth taking the cash out.
• Personal Goals: Are you looking to scale aggressively, or are you at a point where maintaining stability is more important? Your strategy should align with your current investment goals.