APPRAISAL CAME IN SHORTER THAN THE PURCHASE PRICE!!!

Buying & Selling Real Estate
3yFollow

APPRAISAL CAME IN SHORTER THAN THE PURCHASE PRICE!!!

Kevin N.
Investor · London, ON · Member since 2021 · 9 posts · 3 votes

Hello everyone,

I hope everyone is having an amazing weekend

I have a quick question for some of our experienced investors in the group! 

We currently have a property under contract that we plan to buy and hold. The initial purchase price for the property that we locked it in at was $350,000 however, when an appraisal was carried out we found out the property was only worth $334,000($16,000 difference). Our agent is doing his best to negotiate that difference with the sellers and the sellers recently asked if we could pay half the difference of the $16,000 and they would pay the other half. The property is a duplex no repairs needed and will cashflow. What are your thoughts on this situation and if it were up to you would you pay more than what a property is worth if there's some good indication that it would cashflow? Our lender won't finance the difference either so the difference has to come out of pocket. 

Also what tools do you guys use to calculate the potential cashflow of a property and what it's likely to rent for? Right now just going off our realtors estimates. 

By the way I am in the Lewiston, Maine market.

Cheers guys! 

0Reply
57 views

Most Popular Reply

Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y

@Kevin N.

People have asked about an appraisal or finance contingency already - which I would not increase the price

What concerns me about your post is your comment that it would cash flow, then you mentioned this was based on your realtor and not based off of your numbers.

If you don’t know how to calculate cash flow or numbers, I strongly suggest you learn before buying real estate as if they are way off, lenders today will not only go after the home but a deficiency as well if the property is upside down especially if you have assets or equity in other properties.

7e investments53 Reviews
WebsiteView Page
4Reply
See this reply in the discussion

16 Replies

Jump to latestLatest
  • Michael Brattelli
    Real Estate Broker · Medford, NJ · Member since 2018 · 236 posts · 177 votes
    3y

    @Kevin N. It’s a negotiation, if you don’t want to come out of pocket than push back and say you’re not paying more than the appraised value.

    What was the property listed at?

    Worst case scenario do the numbers still make sense if you come out of pocket another $8k?

    3Reply
  • Andrew FreedBusiness Member
    Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
    3y

    @Kevin N. - In this market, tell the seller you won't pay the difference and I'd be surprised if they didn't accept the lower price. It'll cost the seller more than $8K to put it back on the market and start all over again. Worst case, come in last minute and cover half if the numbers on the property still make sense, nonetheless I would hold out. In this market, you definitely have the leverage, especially if the property is in Lewiston Maine. 

    [email protected]781-964-3200Podcast Guest on Show 69 Doors from ONE Real Estate Deal Using Other People’s Money
    2Reply
  • Jacob St. MartinPro Member
    Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes
    3y

    Hello Kevin, I have a couple of thoughts!

    There will probably be lots of people who will tell you that you should never pay more than a home is worth, but I think this is not always the case. If you are 100% sure that the property will be a strong cashflowing rental and you are still meeting your target ROI after factoring in the 8k then I would move forward with the deal. I don't know your market, but in many markets you can expect 2-3% average appreciation year over year, the last couple years have been way higher which might cause prices to fall slightly this year but soon enough they will start going back up again. At 3% appreciation your home will be worth 10k more in one year and you have already made back that 8k!

    However, as I said before you need to be confident about the deal. Does your realtor own investment properties? If not you should not trust their opinion on rent and even if they do you need to seek other opinions. Check out the site rent-o-meter for a very rough approximation. You should also reach out to 2-3 property managers in the area to get their opinion as they should know it well. The last thing would be to conduct your own research on apartments.com, zillow, etc. and build a list of rental comps to identify how much your unit would rent for. Keep in mind location, bed/bath count, square footage, amenities, what types of finishings does the property have, etc. 

    Once you are confident on what the rental values are you will be in a better place to move forward!

    4Reply
  • Dustin Allen
    Real Estate Agent · South Lake Tahoe, CA · Member since 2016 · 681 posts · 644 votes
    3y

    @Kevin N.

    If you have an appraisal contingency, get the seller to pay. They’ll have to disclose why it fell out of contract to any new buyer and there’s little chance they’ll find a new buyer to pay over appraised price. The market is turning towards the buyers favor these days so don’t be afraid to push back.

    3Reply
  • Drew C Grossman
    Investor · Jacksonville, FL · Member since 2019 · 135 posts · 106 votes
    3y

    Hi @Kevin N.


    Michael, Andrew and Jacob all have great insight in their responses and should give you some direction.

    I don’t know what your risk tolerance is and it’s hard to assess how good this deal really is from the general info you gave…with that being said I would say you may have the leverage to pay appraisal and get them down $16k…stand your ground! (atleast in my market). However I would hate to see you lose a “great deal” over $8k…

    Also everyone has a different opinion on what a great deal is…to them.

    If you do want to work with the seller, I think the idea of meeting in the middle give or take is fair. Depending on your agent, they also may be able to throw some commission to the deal if that sellers if trying to achieve a certain Net price.

    The appraisal side of the equation, though certainly essential and beneficial in most cases has a room for fault like anything else. At the end of the day, if you are solid in your underwriting you place a value on the property that’s worth it to YOU.

    Appraisers are not underwriters and you can get an appraisal on bad data.
    Not saying this is the case in your situation, and may actually hhelp you negotiate a lower price….just be mindful that it is a appraisers opinion and it is unlikely but you can have a appraisal miss. There also is a bit of subjectiveness in the process though it is supposed to be objective.

    The property has a value to you based on your underwriting. Since you need to be confident in your numbers ..this leads me to the rental. How confident are you that you can achieve the rental levels? Rentomer is a good gauge but you need to take information from people that own where you are investing…don't trust someone that just looks on the MLS as many times that can mislead you.

    2Reply
  • Drew C Grossman
    Investor · Jacksonville, FL · Member since 2019 · 135 posts · 106 votes
    3y
    Quote from @Dustin Allen:

    @Kevin N.

    If you have an appraisal contingency, get the seller to pay. They’ll have to disclose why it fell out of contract to any new buyer and there’s little chance they’ll find a new buyer to pay over appraised price. The market is turning towards the buyers favor these days so don’t be afraid to push back.


    Another great option Dustin!  

    2Reply
  • Leo R.
    Investor · Member since 2021 · 591 posts · 695 votes
    3y

    @Kevin N. so, the decision seems to be: do you take their offer to split the difference, or do you dig your heels in and say you're not paying over the appraisal?

    For me, this would depend on a lot of factors you haven't mentioned, such as:

    How much will it cashflow? (if it's a hundred or two, I'm less interested...but if it will cashflow $1k/mo, I'd be more likely to take their offer).

    What's the grade of the area?  ...if it's an A or B+ area, I might take their offer, but personally I usually don't mess with C or lower areas--the cashflow is rarely worth the hassle.

    How easy will it be to find tenants, and what type of tenants will they be? ...if there will be a line of top-tier tenants (e.g.; doctoral residents, nurses, etc.) wanting to rent the place, that's one thing...but, if it's a property that will attract unqualified tenants (or few tenants at all), I'm not interested... 

    What's the forecast for appreciation?

    Plus, the suggestions others have already provided are all excellent...

    Good luck out there!

    3Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    Do you not have a appraisal contingency in your contract? How are you going to get the lending for the difference? In this market, I would walk away if the seller doesn't want to negotiate 

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Kevin N.

    People have asked about an appraisal or finance contingency already - which I would not increase the price

    What concerns me about your post is your comment that it would cash flow, then you mentioned this was based on your realtor and not based off of your numbers.

    If you don’t know how to calculate cash flow or numbers, I strongly suggest you learn before buying real estate as if they are way off, lenders today will not only go after the home but a deficiency as well if the property is upside down especially if you have assets or equity in other properties.

    7e investments53 Reviews
    WebsiteView Page
    4Reply
  • Michael Brattelli
    Real Estate Broker · Medford, NJ · Member since 2018 · 236 posts · 177 votes
    3y

    @Chris Seveney Probably the most important comment in this thread.

    2Reply
  • Craig Janet
    Member since 2019 · 223 posts · 261 votes
    3y

    If it was a good deal at $350k (assuming you ran all the numbers), why wouldn't it be a good deal at $342K. The lower appraisal just saved you $8K or more if you want to play hard ball. 

    3Reply
  • Andrew FreedBusiness Member
    Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
    3y

    @Craig Janet - Because of cash on cash return. As a result of the lower appraisal, the buyer has to bring more funds to close hence the cash on cash will be effected. That is why I usually attempt to build in as much of the cash I need as possible into the loan product such as renovation money or seller credits so it lowers my cash outlay increasing my cash on cash return.  

    [email protected]781-964-3200Podcast Guest on Show 69 Doors from ONE Real Estate Deal Using Other People’s Money
    1Reply
  • Janel Kolbo
    Rental Property Investor · Tampa, FL · Member since 2021 · 41 posts · 37 votes
    3y

    This is a perfect time to learn how to run your numbers. It's hard to know if it will cashflow if you don't have accurate rental comps. 

    1Reply
  • Jon A.
    Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes
    3y

    A property is only worth what someone will pay for it. Don't confuse the appraisers articulation of value with the actual value of the house.

    You should have a sense of market value based on the comps. Appraisals are often very arbitrary. Take a look at the report. Are the comps comparable and accurate?

    To get rental comps, go on whatever rental website is most popular in your market. Absolutely do not go by what a realtor tells you. You need to do your own research in every aspect of your business.

    1Reply
  • Kevin N.
    OP
    Investor · London, ON · Member since 2021 · 9 posts · 3 votes
    3y
    Quote from @Kevin N.:

    Hello everyone,

    I hope everyone is having an amazing weekend

    I have a quick question for some of our experienced investors in the group! 

    We currently have a property under contract that we plan to buy and hold. The initial purchase price for the property that we locked it in at was $350,000 however, when an appraisal was carried out we found out the property was only worth $334,000($16,000 difference). Our agent is doing his best to negotiate that difference with the sellers and the sellers recently asked if we could pay half the difference of the $16,000 and they would pay the other half. The property is a duplex no repairs needed and will cashflow. What are your thoughts on this situation and if it were up to you would you pay more than what a property is worth if there's some good indication that it would cashflow? Our lender won't finance the difference either so the difference has to come out of pocket. 

    Also what tools do you guys use to calculate the potential cashflow of a property and what it's likely to rent for? Right now just going off our realtors estimates. 

    By the way I am in the Lewiston, Maine market.

    Cheers guys! 


     Update on this seller ended up accepting the appraisal value of the property. All parties are happy. 

    Thank you very much for each and every persons advice and opinion on this.

    1Reply
  • Carl Hebert
    Rental Property Investor · Auburn, ME · Member since 2015 · 236 posts · 140 votes
    3y

    Another good source for bottom of the market rents is the local Housing Authority. They will have fair market values for rentals in their markets. You have two there, one in Lewiston and one in Auburn. Both use the same base from HUD.

    Always good to know your rent potential before you go under contract.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free