Hello BP Community,
I wanted to share a recent experience I had which took the equity out of a deal in an unexpected way. Our realtor's broker knew a family who was looking to unload a property that was in a trust as part of an estate. The house needed a decent amount of work and the neighborhood was not as good as it once was. We are remote investors so our realtor sent us pics and all the details including the size - 1,928 sq ft 3/2. We confirmed the details using the county assessor's website. We received comps from the realtor which showed that rehabbed rentals in that area appraise for $25-27/ft and should rent for $750 to $800/mo. Based on this information we expected the house to appraise for $48-50K when all was said and done.
We generally try to use the BRRR strategy made famous by Mr. Brandon Turner on the podcasts. So, here are the numbers:
Purchase Price $22,500
Rehab Budget $13,500
Total Invested $36,000 (closing costs and things are including in our round numbers here).
So, we finished the rehab, listed it for rent, and started the cash out refinance process. We received an appraisal of $36,000 which shocked us and at first we could not figure out why it was so low - and then it hit us - the appraiser measured the house at 1,417 sq ft. There is a screened in patio but it is not heated or cooled so we knew that did not count - but even if it was counted - it would not have added 500+ sq ft. Long story short, the appraiser's measurements are accurate and the sq ft in the tax records has been wrong for 40+ years from what we can tell - with no obvious explanation as to why they were off by so much. (NOTE: Taxes are so low in this market that no one really challenges tax values or sizes because you only save like $100 if you win the challenge).
So, now we have a nice rental that should still hit the 2% rule but we have no equity in the deal and thus cannot get our cash out of the deal - we can get 80% of it out at least.
LESSON LEARNED - Don't trust tax records and have your contractor measure the house to make sure you are at least in the right ball park.
I am creating a list of lessons learned in this business - we have only been in it for 6 months in earnest (closed 4 deals with 1 more set next week) but I never saw this one coming.
Any creative ideas on how to deal with such a situation? Has anyone else encountered an issue where the tax records show the house is 25% larger than it actually is?
Did the property ever have a shed, detached garage, or other outbuilding? In some jurisdictions, those count towards the property tax. If the outbuilding was torn down, maybe somebody didn't think to update the tax records.
Several years ago, my parents put a storage shed in their backyard. Their city told them that if the shed sits on the ground, on a poured concrete slab, then it counts towards the square footage for the property tax. If it was built on a frame sitting up off the ground, then it didn't count. So it was built with a frame, up off the ground. :)
If you are local to the property, and the outside shape of the house isn't too complicated, you can ballpark it even before you set foot inside. For instance, if it's a 25' x 50' rectangle, basement + one floor above, garage in half the basement (and you know garages don't "count" in that jurisdiction), then it can't be more than about (25 x 50) + (25 x 25) = 1,875 square feet. (If the house has lots of bays and alcoves and stuff in the outer walls, then it's probably simpler to just measure the rooms inside like normal.)
No storage buildings we are aware of and the local authorities claim they would not count anyway. It remains a mystery to everyone involved how it was so far off.
Unfortunately we are not local to that market but we are now adding a line item to our initial inspection checklist for the inspector to measure the house and confirm square footage.
Thanks for the feedback!