Low Appraisal on our first BRRR

1 Reply

NOTE: this is our first BRRR!!!

Purchase details: 

Duplex in Jefferson County NY, originally listed as 3 bed/1 bath on each side. 1 side was rehabbed and occupied by previous owner, 2nd side was essentially gutted (with one of the bedrooms removed), didn't have any plumbing and was down to the sub floor in most places. Purchase price: $68k. Funding: "Fix n Flip" hard money loan with a $20k rehab baked into the loan. 12% APR with the payment being 1% of the loan each month. Closed 12/21/18, 13 month loan term. Closing costs + downpayment was about $17k (funded by a HELOC on our primary), loan amount $78k. LTV 70%, ARV expected $110K (with the scope of work identified as only inside the property). We purchased through an LLC.

Rehab details:

Created a kitchen on the unfinished side: new flooring, new appliances, new cabinets, new plumbing, new electrical, new countertops. Created a bathroom: built walls, new flooring, new plumbing, installed a bathtub w shower, toilet, vanity. Reconfigured bedroom layout so each was accessible from a hallway (had to enter the master through another bedroom when we purchased the property), laid new carpet throughout bedrooms and hallway, created walk in closet in master. Replaced a few windows. Replaced all the siding on the entire property. Painted numerous rooms. Total rehab about $27k. New configuration - Apartment A: 2 bed 1 bath, Apartment B: 3 bed 2 bath. 

Refinance:

Starting the refinance process. Assessment just came back today at $100k. We were expecting at least $130k. Comps used didn't have any improvements. LTV of refi loan 80%.

My question: 

What are our options? Not likely to be able to sell by end of year. Trying to figure out what to do here. Do we continue with the refi, pay off the fix n flip loan and simply not pay myself back for the downpayment etc? Apartments are currently listed for rent but both sides are vacant. Expecting $2100 in monthly rental income (assessment estimated more like $1600 based on the comps they used). 

We are newbies and this is our first deal, looking for any advise you can offer. Many thanks!

I would go ahead and move forward with the refi to get the hard money loan paid off. That's a pretty high interest rate, so you don't want to hold it any longer than you have to. Sometimes you can contest appraisals by providing the appraiser information that you believe more accurately represents comparable sales to your property. Sometimes they will take this info into consideration and sometimes they won't. It really just depends on the appraiser. Depending on your lender they may allow you to pay for a second appraisal. It would be an additional out of pocket cost for you, but it might be an option. 

I wouldn't try to sell. I would stay the course. Just get the two units rented out, refi out what you can that will still allow you to cashflow based on the appraised rent (not your expected rents). If the market continues to appreciate, you can refi again and pay yourself back at that time. For now I would just build up the income stream and then consider paying yourself back in the future.