Appraisal came in low, is it still a good deal?

45 Replies

Hello BP, I hoping for the valued opinions of the BP community for my current predicament.

A purchase agreement was signed by both parties for the price of $152,500 for a 3/2 owner occupied, with two 1/1’s attached rented month to month without a lease. The breakdown for monthly cash flow is as follows:

$1300 main unit 3/2 (rent that it will yield)

$500 1/1

$600 1/1

$2400 total monthly in rent

-550 Mortgage @4% for 30 years

-250 insurance (yay South Florida)

-183 tax

-240 repairs

-240 vacancy

$937 monthly cash flow

$937x12 months= $11,244/$40,000 cash out pocket = 28.11% cash on cash

$1487 NOI x 12 months = $17,844/$152,500 purchase price = 11.7 % cap rate

Looks like a good deal, right? Here is the fun part. I paid $1500 out of pocket to get rid of termites and to get the electrical to pass the 4 point inspection for insurance. An addendum was made to reimburse the repairs I paid for since the seller did not have the cash to pay to get the cleared 4 point inspection.

And the appraisal came back at $136,000….the appraiser stated that the house was filed at the court house as a single family home and paying taxes as such, therefore, the two efficiency attachments were not allowed to be included into the value of the home since they are additions made recently. The additions were in legal zoning compliance on the appraisal, but added as a line item, not adding the true value of the attached 1/1's.

152,500 – 136,000 = $16,500 difference and the seller is not willing to budge one cent. And so far she is not willing to do a side deal. There were not any other offers made when the property went under contract.

The three options I believe I have at the moment are;

  • 1.Walk…but what do I do about the $1500?
  • 2.Offer cash on the side close to 16k, so far she's not listening to side deals (but why should I since no one else will be willing to pay more than 136k) ((would this deal still be worth it if I paid 16k on the side?))
  • 3.Offer 145k or less and allow her to shop the deal for 30 days.

Any other options the more experienced have to offer would be greatly appreciated, thanks!

SRF are not appraised as rental income properties. They use the sales comparison method rather than the income cap method. If the numbers work I would place less emphasis on the appraised value.

What the real question is for you is, "Why are you buying this property"? If any or all of the three options still gets you what you want, then move forward.  Keep in mind that the appraisal is more than just a professional valuation, it is what allows you to finance the property since the lenders will base their financing decisions on this appraised value.  The appraisal, doesn't have to be the "end all" to making a deal right.

The answer, based on your 3 options, is "yes"...to all three. The key is the order of appearance (OOA) you exercise those three options in.  Here is how I would do it, w/ explanation;

1 - Walk
As far as your $1500, since the low appraisal doesn't allow you to get the financing, you might be able to get your $1500 back...but, "walking away" is actually your third option, in OOA. (Rule of thumb:  Never spend money on a property you may not get back until AFTER you close).

2 - Offer/add more cash to the deal upfront out of pocket -
This really affects your CCR, not your sellers price, or what you are paying for the property, in any way. All this does is have you make a larger down payment...which is pretty common in situations like this...when the appraisal comes in low, but the deal is still a good one. On the plus side though, your cash flow should go up since you're financing less. This is probably your 2nd option in the OOA order.

3 - Revise offer based on Appraisal -
This is your number one move.  This happens a lot.  In some ways, you should be thanking the appraiser...I know I always do when this happens.  Now I (you) can go back the the seller and say"see. I told you it wasn't worth that price".  You're also correct when you say they may not be able to sell it at the price you agreed on to anyone else since any new potential buyers will be looking at that same appraisal.

However, and this is a big one, if the next potential buyer sees the same numbers you just presented, and they like them, they may go with Option #2 above, and you will be looking for you next deal.

Isn't REI fun? I love this part of it. So, "let the games begin".

Joe Villeneuve
REcapSystem
A2REIC

Originally posted by @John Thedford :

SRF are not appraised as rental income properties. They use the sales comparison method rather than the income cap method. If the numbers work I would place less emphasis on the appraised value.

The appraiser is looking at this as a SF, but the buyer and seller see more than one unit, I agree though that the CAP rate has nothing to do with this analysis...in any case.

Joe Villeneuve
REcapSystem
A2REIC

@John Thedford  Despite everything we've done so far, the seller thinks we are trying to pull a fast one. She's skeptical about a side deal even after everything has been completely explained, that, in the end, she gets what she wants, just in a different form. 

@Joe Villeneuve  Thanks for the analysis of each option. I agree with your number one choice, but, like you said, it's a big risk to leave it to the fate of the next prospective buyer to pass on this deal. Would you make an offer that expires in 30 days in order to add pressure?

Originally posted by @Angelo Behar:

@Joe Villeneuve ....... Would you make an offer that expires in 30 days in order to add pressure?

 Actually, I would do the opposite.  Keep it as an open offer.  If you make it time sensitive, your seller may get more suspicious and take it as an ultimatum. If you leave it open ended, you are giving the impression you are still interested...but due to issues not under your control (appraisal) you can't follow through at the agreed price.

Joe Villeneuve
REcapSystem
A2REIC

@Joe Villeneuve  awesome advice. thanks. I will proceed with the deal using that approach. Thanks!

Originally posted by @Angelo Behar :

@Joe Villeneuve awesome advice. thanks. I will proceed with the deal using that approach. Thanks!

 Eventually, if the door is still open, when nobody else comes forward, your're adjusted offer looks more appealing...and more realistic.

Joe Villeneuve
REcapSystem
A2REIC

Why are you saying the $16k extra would be a "side deal"? It needs to be brought to closing, and on the HUD.

@Wayne Brooks  brings up a good question.  If you entertaining paying the extra $16k, why not just make a larger down payment?  What does a side deal do for you, other than break the law?

@wayne brooks it would be added and in compliance but the seller doesn't like its listed for 136k under a new contract. Lawyers and realtors have told her its ok but she thinks if she agrees to 136k I'm going to try and play games with the rest of the money. My verbiage of "side deal" was probably not the best way to explain the situation. I was just trying to explain that its the same result with chopped up amounts. My fault for the lack of clarity.

Angelo I would have your realtor communicate that you are not "playing" games. That you have already come up with money out of pocket to get this deal closed. Do you have a family? I would  write the seller a sincere letter! Put. A picture of you and your family on it. Make her see the human side of the deal! I have done that a couple time. It worked once and it didn't work another time by its a shot . When it did work we won the deal even though we offered les money.

@Angelo Behar  

What I am struggling with is why the price needs to be changed at all?  When I had this happen on a property, the bank told me I needed to eliminate the difference (between the amount on the sales agreement and the appraisal) by brining more $ to closing, negotiating lower sales price with seller, or a combination of both.

If you are willing to pay the difference, I am not sure what the problem is.

What am I missing?

Originally posted by @Angelo Behar :

@wayne brooks it would be added and in compliance but the seller doesn't like its listed for 136k under a new contract. Lawyers and realtors have told her its ok but she thinks if she agrees to 136k I'm going to try and play games with the rest of the money. My verbiage of "side deal" was probably not the best way to explain the situation. I was just trying to explain that its the same result with chopped up amounts. My fault for the lack of clarity.

 Angelo, like others, I'm not understanding what the problem is.  Why would the seller care what the home appraised for. The purchase price is still the same - you just have a larger down payment.  If you can come up with that cash,  just move ahead with the deal.     

Originally posted by @Angelo Behar :

@wayne brooks it would be added and in compliance but the seller doesn't like its listed for 136k under a new contract. Lawyers and realtors have told her its ok but she thinks if she agrees to 136k I'm going to try and play games with the rest of the money. My verbiage of "side deal" was probably not the best way to explain the situation. I was just trying to explain that its the same result with chopped up amounts. My fault for the lack of clarity.

Why get her to agree to 136K at all? If you're comfortable paying the 152K then keep the contract as is. The only person impacted by the low appraisal is you and your ability to borrow up to that 136K number with respect to the LTV allowed. So your lender will only be willing to fund 108K-ish instead of 123K-ish. Now you just bring a check to the closing for the 44K needed on the full offer.

Lenders don't care if you pay more than appraisal for a property, they only care that they haven't lent more than their LTV requirements on the property.

@Elizabeth C. I like the approach. We are definitely trying to explain after everything I've done,  we're not trying to pull a fast one.

@Dwayne S. I'm getting financed at around 108k instead of 120k. Because the terms are changing on my end to get the deal done, the seller thinks I'm trying to trick her. She also thinks I had something to do with the 136k appraisal. 

Originally posted by @Angelo Behar :

@Elizabeth C. I like the approach. We are definitely trying to explain after everything I've done,  we're not trying to pull a fast one.

@Dwayne S. I'm getting financed at around 108k instead of 120k. Because the terms are changing on my end to get the deal done, the seller thinks I'm trying to trick her. She also thinks I had something to do with the 136k appraisal. 

 Angelo, again, this doesn't even concern your seller (not sure why she is even involved in this discussion).  It's between you and the bank.  The seller gets the same amount of cash.

@Angelo Behar  

I don't understand why you feel the need to change the purchase price/contract.  It only complicates things for no reason, and could lead to legal issues for you.  What's your reason for wanting to do that?

@Angelo Behar  

I agree 100% with @Andrew S.  

Perhaps there was a breakdown in communication between you and the bank when they explained it to you.  Based on how you explained it in your posts, I can totally understand why the seller is spooked. 

Originally posted by @Angelo Behar :

@Elizabeth C. I like the approach. We are definitely trying to explain after everything I've done,  we're not trying to pull a fast one.

@Dwayne S. I'm getting financed at around 108k instead of 120k. Because the terms are changing on my end to get the deal done, the seller thinks I'm trying to trick her. She also thinks I had something to do with the 136k appraisal. 

 Simplest solution I can see; place your full 44K or whatever it is in escrow now so she can see that the money is real and there's nothing you're doing to get out of the deal. 

Angela, As you can probably tell, if I could summarize the thoughts of most( if not all) that have posted here it would be this.  It appears as though you are trying to take  something simple (just increase the down payment by $16k), and making it way more complex than it needs to be.

Joe Villeneuve
REcapSystem
A2REIC

@Matt Devincenzo  tracking. The numbers work at 152,500 despite the 136k appraisal, part of my question was whether I should move forward with the appraisal coming in way low. But the significance, or, irrelevance of the appraisal was something that is new to me. Even though my numbers are what they are, the property is going to be worth 16,500 less than what I'm purchasing it for.

Originally posted by @Angelo Behar :

@Matt Devincenzo  tracking. The numbers work at 152,500 despite the 136k appraisal, part of my question was whether I should move forward with the appraisal coming in way low. But the significance, or, irrelevance of the appraisal was something that is new to me. Even though my numbers are what they are, the property is going to be worth 16,500 less than what I'm purchasing it for.

Angelo, it has already been stated in this thread but I will state it again.  That appraisal is the opinion of one individual.  Both you and the seller clearly agree that the property is worth more than the appraisal. 

Originally posted by @Angelo Behar:

"......But the significance, or, irrelevance of the appraisal was something that is new to me. Even though my numbers are what they are, the property is going to be worth 16,500 less than what I'm purchasing it for.

 Not true.  The Appraisal came in $16k less.  That has nothing to do what it is worth to you.  That is what it is worth to the lender...and thus, what the lender makes their loan to you based on.  The value of this property to you hasn't changed.  You're buying it for the cash flow, as in a "rental".  The only two things changed that impact you (based on the appraisal) is this forces you to get a lower loan...which in turn means lower monthly payments...which then means you get higher cash flow, but a lower cash on cash return.

If you can live with that, or more importantly, if the initial deal was where you are at right now, would you move forward on it?  A deal is a deal, a good deal is a deal you make...even if it wasn't the same as the one you started out with.

Joe Villeneuve
REcapSystem
A2REIC

we do not pay above appraisal. On the other hand we do everything possible to show we are genuine and ready to close. We provide our full down payment as Ernest money. 

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