Armchair Estimation of ARV? Confusion....

6 Replies

Current landlord of two properties (total 3 units) and living in one unit. Getting ready for BRRRR. When running numbers, I am having trouble appraising multi-units and understanding an appraisers strategy when looking at a multi-units here in northern Vermont. I have mapped out GRM, cost per unit, cost per sqft, and cost per bed for many properties in two markets I am looking to invest. How can I make sure the appraiser reaches my goal ARV?

I am seeing some turnkey properties with great cashflow listed at prices where the GRM and fellow ratios are below market. Could I pick these up, let them "season" and reappraise later on for a higher appraisal ( while matching comps) with minimal work?

Is it me or is the appraisal process a black hole of confusion? My friend had a duplex appraised for a divorce last year and it came in at $300k. 7 months later he did it again for a HELOC and it crossed $330k. 10% in a few months with no improvements? Seems like the appraiser played nice with the bank trying to hit the HELOC number he wanted. Is this normal?

And last question, how does an appraiser find comps in small rural towns where multi-units sales are far and few between? Where I'm looking the next  solid "group" of recent comps is about 19 miles away. Would the appraiser compare to these because it is in the same market? 

Bumping this thread up. Thanks in advance team. 

Tom, I was disappointed nobody has answered or commented!  I would love to read their responses!  I cannot really answer much of your questions myself, other than to say, generally, that appraising is always and ART, not a science. So you have to learn values for yourself, and looks like you have a penchant for analysis, so just keep doing that, and the feedback loop will give you confidence over time, in your own OPINION of value, which is the most important one!

    Here's how you'd determine the value of a multi-family income property.

    1. Determine the net operating income of the subject property you are considering purchasing.

      Example: A six unit apartment project yielding $30,000 net profit from rentals.

    2. From recent comparable sold properties, determine the capitalization rate, which is NOI/Value.
    3. Divide the net operating income by the capitalization rate to get the current property value result.

      Example: Assume a capitalization rate of 11%.

      $30,000 / .11 = $272,727 current value of the property.

@Tom De Moya I have seen appraisers that were VERY generous with a HELOC appraisal. I don't have any evidence to show how common it is but I know it happens a lot and I've been seeing it for about 30 years. My own parents dug themselves into debt by getting high appraisals and cashing out the equity. When tough times hit, they couldn't sell the home for anything close to what the appraiser said it was worth and they eventually had to foreclose.

My most recent example was a couple months ago. Sellers told me the house was appraised 18 months ago for $325,000 and they borrowed some equity to pay for a new roof and siding. I ran the numbers and came up with a value of $250,000. I wasn't excited to share this news with the Sellers but had to be honest. Turns out, they knew it was too high but wanted to cash out the equity and rolled with it. They had also put it on the market for sale and didn't get a single buyer to look at it for six months! We listed it for a reasonable price and it's under contract for exactly what I said it would sell for.

This is one of the reasons I think we're going to see a lot of investors (including those on BP) dig themselves into debt and lose everything. The BRRRRRRRRR strategy encourages people to cash out their equity so they have cash for the next deal. This may be an OK strategy as long as the appraisers are safe in their valuations. If they are overly optimistic and give high valuations, the investor could cash out too much equity and put themselves in a bad spot.

Nathan, I agree 100%. Had one of mine in Powell, appraised 2 years ago for a HELOC, at a VERY high appraisal. I will show it to you tomorrow, a block from the one we are going to site visit. And YES, over-leveraging is really playing with fire, anytime, but particularly in our local market where there is little appreciation to count on to bale anyone out. You can see why I am so conservative and hard-nosed about my analysis, using 40% allowances for Mgmt/Maint/CapEx/Vacancy. If it can show a positive CF after those and the PITI are deducted, then it is probably, at least, safe-er. And that is with me, as a seasoned long time construction and real estate pro, assessing the costs and risks. Leverage is a two-way deal, and can work against you as fast, or faster than for you.

Thanks for the vote of confidence @Rob Cook

@Nathan G. What do you think of my first question? Assuming ratios all match comps, do you think it would be straight forward to earning an ARV high enough to pull out my downpayment on something close to turnkey?

I think as long as the finances of each property hold up well, I see little downside in having generous appraisals by banks. The question is if these will come in or not. 

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