Cash out re-fi Gone Wrong. Advice needed!

11 Replies

So myself and my business partner have run into a situation where we need some advice. We bought a duplex in August of last year in Spartanburg, SC. It's near downtown in a great neighborhood where it's mostly single family homes which are valued around 170k. We purchased the duplex for 77k and put 20k into fixing it up because we planned on holding this property for a while and we wanted it as maintenance free as possible. So we're in for around 97k.

We got our renters in January of this year after fixing it up and it is bringing in $1400/month total. We are now looking to do a cash out re-fi to pull out our cash and move forward purchasing other properties. The first bank we met with wanted us to put the duplex into our personal names instead of the business name so that we could do a residential loan instead of a commercial. They didn't want to do a commercial loan for a duplex basically. So we left that bank and found another who is on board with this type of investment. They said they will do a loan at 80% of the value, 5 year loan w/ a 15 year AM, around 6 % interest. So they ordered an appraisal and it came back at $80k. I was shocked. I'm guessing they compared that duplex with other duplexes in the area because of the type and I'm guessing there aren't that many of them to draw from to increase the value. It's just crazy because if you look at the neighborhood and desirability there's definitely value there. The house right behind it that you can see from the backyard is a McMansion worth probably half a million easily.

Taxable value is around 100k. Houses on that same street are in the 170s, and we purchased it and self-appreciated it to the high 90s, but we're getting a value of 80. Talk about a let down.

We can always sell it and probably make a good profit doing that, but I would rather keep it because it's producing such good income right now compared to the estimated debt service that we would be repaying if we could get a loan.

My question is does anybody else have any other ideas for pulling our cash out and getting as much as possible so that we can move on to other projects?

I am hesitant now of appraisals because they seem to really dictate everything and this one seems so subjective.

The value of the single houses in the neighborhood aren't relevant, the only thing that matters is what other duplexes in the area are selling for. If the comps support an $80k price then that's what your property is worth. You can't use the single family homes as comparables so even if they're selling for $1M it's irrelevant unless you're selling your duplex as a tear down for land value. Any cash you pull out is going to be based on an appraisal unless you have a friend or family member that wants to lend you money.

@Patrick L. I agree.

The appraisers job is to check comps and make sure his appraisal is on the conservative end of the spectrum. On the bright side your property is cash flowing and you have time on your side.

The appraisal came out lower probably because houses in your area sell faster and at higher prices than duplexes. In this case, duplexes are worth less. I know it's hard to believe but that's how the market views it. Having said that...here are your options: (at least what I can think of based on my 10+ years experience)

1. Order another appraisal and contest the first appraisal you got from the lender

2. Approach other banks (start with local banks or credit unions - they might be more flexible with their underwriting guidelines)

3. Sell the property but do a 1031 exchange (so you don't have to pay taxes on the sale) but if you do #3, you need to buy a property with a higher basis - maybe upgrade to a 4-plex

4. Approach a private lender who might be more flexible than banks

@Chesley White As others have said, you use the best comps, not the closest properties, so the appraisal may be correct. If it's cashflowing that well, I can't imagine why you would want to sell. If they're willing to do 80% of $80k, that's still $64k out, so you're in for less. If that's the best you can do, I'd take it.

I hate to be captain obvious here, But the best comp the appraiser had was the last purchase price from August at 77k.

I would put the property and conventional mortgage in both of Your names, shooting for a 5 or 7 yr ARM locked in the 3's, with a 30yr am.

Then enjoy the cash floooow, and move on to the next adventure.

John

I'd get in touch with a few real estate agents in the area and ask them to give you their estimate of a selling price. You might get unpleasantly surprised, but at least you'll have a better idea of what its really worth. As others have pointed out, you made a serious error by considering the value of SFRs in the area. Those just cannot be used as comps. Tax values are also generally not related to market values.

Sounds like you have a bunch of cash tied up in this deal. You might have to settle for a lower loan amount in order to get some of it back out.

I don't want to pour gasoline on the fire, but - did you do any research prior to buying? Did you find any comps prior to buying? If you located comps that you based your ARV on,. then I would contest the appraisal. Do some research on line and see what other homes sold for. Try findcompsnow on line. You might be able to supply documentation to influence the next appraiser. If the appraiser is right, take the deal and move on. Food for thought.

@John Moore I did my research, however I just did the wrong type of research apparently. I didn't realize at the time that we bought that you didn't use SFH as comps. I was just thinking residential was residential and they would relate, and the other residential in that neighborhood looked great. So lesson learned there.. @Jon Holdman Not a lot of cash tied up, but it was our operating cash on a project per project basis. So with that being tied up we have to get creative to find funds to move on to the next project.

We'll get the actual appraisal report from the bank tomorrow so we'll know a little bit more and see what other options we might have but yeah it sounds like if nothing else we should at least take what cash we can get and move on. At least it'll be a good investment for us long term with the cash flow we just have to get it situated right.

Thank you all for the advice!

Yep, been there. You have to be really careful on comps and only compare like to like. Even within SFRs you have to compare ranches w/o basement to other ranches w/o basement, two story to two story, etc. And you really want plenty of comps. I considered a duplex at one point that was in an area with few other duplexes. Lack of comps was the reason for not buying. On another deal I was comparing a ranch w/ basement to trilevels. Fortunately the appraiser caught it and I used that to negotiate a better deal with the seller. And on yet a third deal I made a loan to a rehabber for a house on a busy street. When he went to sell eight months later, the comp picture had changed and value was much lower. Only houses on that busy street and another busy street a few blocks away were used for comps. Valuation can be very, very tricky. This is one place you have to be very careful.

Originally posted by @Chesley White :

We can always sell it and probably make a good profit doing that

Unfortunately, this isn't really the case either. If you can't get a strong appraisal for a refinance, then a buyer isn't going to be able to get a strong appraisal for a purchase. The only way this would work is if you can sell without any appraisal which is almost always going to be a cash buyer.

It sounds like you've got a duplex in a nice neighborhood. I would keep an eye out for others that get listed and try to get them at or below the $80K range. If any pop up at a much higher price point and sell, then you've got the perfect ammunition to refinance and get cash out of yours down the road.

I was in a similar situation and it's very frustrating. I had to come out of pocket to refinance a property I thought I'd be getting cash back for. The property is in a great neighborhood where nobody sells multifamily properties and SFRs almost always have single digit days on market. The appraiser had to go to a completely different neighborhood to find "comparable" multifamily property which really screwed me on the valuation. It still turned out to be a great property for me, just set me back with regards to capital at the time.

I had a little bit of a similar experience with a duplex I wanted to get a cash-out refinance on. Prior to purchasing, I checked out the value of sold duplexes and the value for a recent comp seemed good and the duplex was a pretty good deal. Came time to cash out refinance (which was 6 months after the purchase) after putting in quite a bit of rehab, and the 3 comparables they came up with were junky foreclosures without any rehab. The duplex I bought would have come in at the appraised value at the time I bought it, but they were now valuing it the same as if I had done no work and disregarding any work that was put into it. Appraisals are indeed very frustrating.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here