Worried about equity and property value for turnkey purchase

5 Replies

Hi,

I just made an offer on a turnkey rental property (duplex) in a rural town. It is recently renovated, and fully occupied. It will cash flow immediately. My offer is significantly less than the listing price. Read below for why. (I don't expect the offer to be accepted)

My concern:

There are not many comparable properties in the area. Given this, and the fact that I don't know the area that well, I cannot be confident in the value of the property.

I might make great cash flow for a few years. But, if I want to sell the property in 5 years and can't find a buyer, I may have to sell for $20K less than I bought it for. I may actually end up losing money!

How can I acquire confidence in the value of the property? Can I use my lenders appraisal as a source of truth? They would tend to be conservative on the estimate, I would imagine.

Originally posted by @James Wierzba :

Hi,

I just made an offer on a turnkey rental property (duplex) in a rural town. It is recently renovated, and fully occupied. It will cash flow immediately. My offer is significantly less than the listing price. Read below for why. (I don't expect the offer to be accepted)

My concern:

There are not many comparable properties in the area. Given this, and the fact that I don't know the area that well, I cannot be confident in the value of the property.

I might make great cash flow for a few years. But, if I want to sell the property in 5 years and can't find a buyer, I may have to sell for $20K less than I bought it for. I may actually end up losing money!

How can I acquire confidence in the value of the property? Can I use my lenders appraisal as a source of truth? They would tend to be conservative on the estimate, I would imagine.

First, when the lender orders an appraisal, it is an opinion.  The lender themselves use outside companies (in most instances) to rotate through appraisers randomly.  So, you would be getting an independent, random appraiser giving you there opinion.  The best way to get an accurate idea of what the value would be is to have three appraisals done.  You would then have three different opinions and can average those out to get an accurate idea of an independent value.  That would be costly, but if you are worried, that is one way to go.

The bigger issue is this.  

You ran numbers and you were satisfied with the calculations at the price you offered.  Why are you already thinking about selling?  If you are worried about exit strategies and the rural aspect of the investment raises your risk for resale, then calculate that into your price and buying decision.  It is a risk.  Your job is to determine if the risk is worth it.

If you are are just thinking out loud that you may want to sell in 5 years, given your own statements that it is making great cashflow for 5 years, then who cares?  While it cashflows you keep it.  Place is on the market for your price and if it sells, then it sells and if it doesn't then it cashflows.

I think you are very smart for asking questions and thinking about scenarios, but based on what you've listed, assuming you've done all your homework and they accept you offer, it sounds like a good deal and I would be less worried about a worst-case scenario.

Best of luck

The appraisal is your best bet. And there aren't any turnkey providers I know of that accept offers lower than their advertised prices. They are usually non-negotiable.

And I agree with @Chris Clothier about the focus being on the cash flow and why plan to sell in 5 years?

@Ali Boone and @Chris Clothier -- thanks for the advice.

Let me just clarify that I do not *plan* to sell in 5 years. I am just thinking of worst case scenarios, i.e. I *need* to sell for some reason. It is highly unlikely, and perhaps I am worrying too much because it's my first rental property.

Well maybe, but you're asking a good question. It means you're looking at exit strategy and risk mitigation both, which kind of go hand-in-hand anyway for this situation. So I think it's great you're looking at it.

The best thing you can do is: 1. get the appraisal and any other comps you can get that will give you a good idea if you're getting the property for a legit price or not (looking at comps for any kind of property isn't rocket surgery) and 2. buy in a solid market. What you don't want to have happen is you get the perfectly-appraised property and then the bottom falls out of the city it's in and the values go into the trash and you can't recover (different than a general real estate crash, because those tanked values will come back up...just don't sell while they are down).

All the while, have that steady cash flow in place. 

It's all about risk mitigation. You can't avoid every possible problem, but you can make the best decisions you can in order to avoid them as much as possible.

Originally posted by @James Wierzba :

Hi,

I just made an offer on a turnkey rental property (duplex) in a rural town. It is recently renovated, and fully occupied. It will cash flow immediately. My offer is significantly less than the listing price. Read below for why. (I don't expect the offer to be accepted)

My concern:

There are not many comparable properties in the area. Given this, and the fact that I don't know the area that well, I cannot be confident in the value of the property.

I might make great cash flow for a few years. But, if I want to sell the property in 5 years and can't find a buyer, I may have to sell for $20K less than I bought it for. I may actually end up losing money!

How can I acquire confidence in the value of the property? Can I use my lenders appraisal as a source of truth? They would tend to be conservative on the estimate, I would imagine.

 Have a Realtor run comps & get an appraisal.

P.S.

There is no such thing as a sure thing in real estate. You must be willing to take on some level of risk to play this game.