Turnkey Investing - Paying over appraisal price
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Alex CraigBusiness Member
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votesI would not pay over appraised value, ever. As a TK seller, I just sold one to a BP user where our sales price was $99,500. Appraisal came in at $97,000. I ate the $2,500. I could not see why my investor would be interested in paying over the appraised value. My bank when I bought it appraised it for $100,000, so I thought the $99,500k appraisal was a slam dunk, especially since I added granite counter tops in the kitchen and bathrooms. Rent was $1,095 at 8% mgmt as a FYI.
16 Replies
- Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes10y
@James V. What city is the property? Appraisals are certainly more art than science, and it is entirely possible that yours was a conservative appraisal or not. In short appraised prices, don't equal market price, which is whatever someone will buy it for. You will have to decide if you are that someone. I once experienced purchasing a turnkey property that came in $5k lower on the appraisal below the contracted price. The provider lowered the price accordingly without my asking, although I think they did have some discussion with the appraiser as to why it came in so low. It was one of the largest homes in the neighborhood, so comps were hard to come by. I think they did so because I was an established investor with them at the time for over a year.
- Investor · Herndon, VA · Member since 2015 · 185 posts · 74 votes10y
I wouldn't pay more than the appraised price. Simply because it leaves a bad taste in my mouth later on to some philosphy I hold on to. Another thing to consider is how lower the appraised price is and are you comfortable with pulling the trigger. We have investors with different mindsets and risk taking personality so it boils down to are you comfortable with paying over the market price or not. I wouldn't if you ask.
- Irwin, PA · Member since 2015 · 152 posts · 52 votes10y
I look at turnkey properties as having prepaid all of your CapEx up front. Depending on your strategy and real estate goals, they can make great investments.
Paying higher than appraisal is akin to pricing in appreciation in my eyes.
What I like to do is figure out what my ideal cash flow is, compute my expected CapEx costs (new roof / 25 years + new HVAC / 15 years + new hot water tank / 7 years, etc.), financing, taxes, etc. then compute my offer based on that data. In a hot market, you may not get the deal but if you do you'll get your price for sure.
- Investor · Lake Forest Park, WA · Member since 2015 · 108 posts · 35 votes10y
As happened with @Larry Fried, I would hope the turnkey provider would lower the contract price to match the appraisal, otherwise it would leave a sour taste in my mouth that I possibly overpaid.
- Monterey Park, CA · Member since 2014 · 157 posts · 80 votes10yIs this your 1st purchase with this TK? Do you mind sharing the city? Unless you have something in your contract that you can get out of the purchase due to apprised value lower than your purchase price, not sure you have many options. You can suck it up and buy it, forfeit the earnest money and walk, or talk to them and see if they will do something about it. Personally, if this TK wants your business, I would suspect them reaching out to talk already. If not, then maybe you want to think twice if going with them. Good luck. Henry
- 10yJames V.Rental Property Investor · Upland, CA · Member since 2015 · 8 posts · 2 votesOP
I would prefer not to mention the city, as I think it makes the TK company very apparent, and as I said, I have a great deal of respect for them - but the situation got me thinking.
Escrow has closed, I own this home - I came in with the additional funds.
Mayank S. my thinking was more along yours, it really boiled down to a taste in my mouth.
Larry Fried This was my first purchase with the company, I would hope they would be willing to work with me if this were to happen in the future.
Dominic Lucarelli, ultimately this is what it comes down to for me as well, the financials worked, the additional funds were not of significance.
It just left me thinking about the situation. Thanks for the insight all -
- Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes10y
Originally posted by @James V.:
Would you ever pay over appraisal price for a turnkey investment property?
This is apparently not uncommon in the turnkey investing space. I wont name the company I'm working with, because I do respect them, and believe they they're one of the premier operators in this niche, but my appraisal came in lower than contract price.
I understood turnkey pricing essentially equated to 'retail' pricing, if you will, and can justify retail pricing based on risk model and the passive approach, but the questions remains:
Would there be a case for OVER market pricing? Appraisal lower than contract price.
I would never. It's probably Memphis Invest. They are very upfront that you may pay above appraisal price. If they are upfront about it, then that is a decision you have to make. If they are not and the appraisal comes in bad, then I would just walk away and look for the next one if they won't meet at the appraisal.
There are many philosophies on this, my opinion is that I don't overpay for properties period.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@James V. how much over appraisal would be the determining factor.. 20k more then probably not.. couple grand well that's not a big issue
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes10y
There are a few factors you have to look at. What market you are buying in matters, only because some markets are known for notoriously low appraisals (Atlanta was like that back in the day). So if a property comes in well under market value for the appraisal but it's in a market that appraisals are usually good, that's different than if properties usually come in low.
The other factor is that appraisals tend to vary greatly. If you don't believe me, get a second one through another appraiser on the same property and see what they come up with. One thing to think about is the comps in the area....if they are all beat-up foreclosures then the value of your freshly rehabbed property won't compare well.
This is an old article but maybe it will shed some more light...
- Registered Nurse (ICU) · San Jose, CA · Member since 2014 · 496 posts · 332 votes10yNope! Lower the price or I would walk. But that's just me.
- 10yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
I would not pay over appraised value, ever. As a TK seller, I just sold one to a BP user where our sales price was $99,500. Appraisal came in at $97,000. I ate the $2,500. I could not see why my investor would be interested in paying over the appraised value. My bank when I bought it appraised it for $100,000, so I thought the $99,500k appraisal was a slam dunk, especially since I added granite counter tops in the kitchen and bathrooms. Rent was $1,095 at 8% mgmt as a FYI.
- Rental Property Investor · Atlanta, GA · Member since 2014 · 807 posts · 274 votes10yJames V. My short answer is yes I would pay more than an appraisal. Appraisers are not infallible. If you know your numbers, know what your strategy is and it makes sense then why not be willing to pay more than the appraisal. That being said, if the appraisal comes in lower than expected, re-negotiate but it's not necessarily a reason to back away from a deal. There are other ways to make things work.
- Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes10y
Huh, it's interesting to me how many folks on here are sensitive to what an appraisal for a property is. Personally, I look at appraisers the same way I look at inspectors: they're just people. I once paid good money for a good inspector (very highly recommended and reviewed in the area - used by lots of realtors, etc.) who completely missed three pretty significant items - one of which was that the roof had FIVE LAYERS of shingles. That's a story unto itself...
I've also watched a realtor accept several offers on a house over the course of several months, only to have it not appraise for enough every single time. 4 successive offers from different parties were all 'too much' or 'more than the house was worth'? Apart from intrinsic value, something is worth what someone is willing to pay for it - why does an outside evaluator's opinion have more value than what the market says it is worth?
And this is where my ignorance will really show: South Bay San Francisco - a house is comprised of ~$150,000 worth of material, and sits on ~$200,000-$300,000 worth (right now) of land. It sells and appraises for $650,000. How? Why do market forces get included in one area's appraisals, but not another's? Who is actually figuring out the value of the market forces? If Tech crashes, and 2 months from now the 2 bed/1 bath fixer upper someone just paid $650,000 is now worth $350,000, was it a bad appraisal? (Yes, I'm being a little flippant about this market, but I think it frames my question well.)
- Seattle, WA · Member since 2017 · 9 posts · 2 votes8y
I am currently evaluating turnkey properties myself and am concerned about the appraisal coming in low. I believe that everyone should ask for a financing contingency that the property must appraise at the sales price (especially for a turnkey property). There are a couple of reasons why not having this contingency is a non-starter for me:
1) This is akin to starting at a NEGATIVE equity position - Sure the appraisal is a subjective value from one human being. However, a lower appraisal price leads to additional cash out of your pocket, which is factored into all your Cash on Cash/IRR/ROI calculations forever. For those metrics nerds, you know that your initial outlay of cash (which should typically only be the down payment + closing costs for financing), is one of the most sensitive variables that impact your projected Cash on Cash return calculations. Try a simple example of how your projected Cash on Cash return changes on a $100k property (assuming 20% down), when you are also forced to pay an additional $10k if the property only appraises at $90k. It might "only" look like $10k, but do the math and you will see the material impact on your return.
2) Turnkey properties are already being listed at Market Price. If you are required to fork over additional money because a property doesn't appraise for the sales price, you are by definition paying ABOVE market price. Why would an investor do that? Paying retail price for a turnkey property might be justified as the turnkey company has done the heavy lifting in rehab and finding a tenant, which allows a passive investor to be passive. However, they are also already handsomely rewarded for this through the list price that they are selling the turnkey property for. Why would an investor feel the need to pay above Retail price (i.e. through paying the difference in an appraisal coming in low)?
Even if a property only comes in "a little low", there seems something fundamentally wrong about the investor having to fork over the difference. I think that if a turnkey provider stands by their property (and especially if they are requiring you to use one of their preferred lenders), then I would think that "sorry the appraisal didn't come back as expected, please fork over the difference in cash" should be an unacceptable default scenario. Said differently, the default scenario should have the company paying the difference in the appraisal price and sales price to "make the investor whole". I would think that this is a better long term approach to building customer trust for the longevity of a business relationship, plus it just makes good ol' common sense.
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
The market I invest in is known for low appraisals. It's a challenge, but the turnkey investor has to be getting a good enough deal to still get the cash on cash ROI expected from the property. If you're using debt, you're going to be paying a larger downpayment since the lender will only base their LTV on the appraised value... factor that it.
I had an appraiser recently look at a nice property of mine, had 2 comparables at 65 and 72 that recently sold nearby... and threw in one at 40k as the third! The third property wasn't rehabbed at all though, and mine was BRAND NEW. In this event I wasn't upset, I know the appraisal is erroneously low. I know I can sell the property for a higher dollar amount.
Funny thing, they only do this for non-owner occupied purchases where I'm at. For owner occupied, I've observed them to always appraise RIGHT AT THE PURCHASE PRICE. Ridiculous.
One more thing. An appraisal doesn't dictate a property's true value... but what someone is willing to pay for it does. If other investors will pay a higher price for this property, they've now set a new market value. Even if they may be inflating their purchase price.
Final note- careful with turnkey providers. I strive to be one some day soon, so I won't generalize. I know many reputable, honest provider. Just have your own pro-forma, and be conservative about rents, value, and operating costs.
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