Is this a red flag in a listing?

Question

I'm seeing "Cash only - no comps for an appraisal" in the description of a listing for a multifamily in a small town and am wondering what the downside of this could be. The all cash payment seems like a major downside being that I'd have to look at private money which could delay the cash flow while that's being paid off...but what else am I not considering here? Thanks!

Michael Seeker · Answer

@Adrian Rae - If there are no comps and it's a small town then a couple things you'll want to keep in mind:

1. If/when you want to sell the property, you'll likely have no comps and a very small buyer pool to work with.  This is never ideal as it limits your options.

2. Do you understand the demand for rentals in this small town?  When a unit turns over, does it take months or years to fill?

3. Are you self managing?  If not, is there anybody who can do that for you in the area?

I would want look for a very large margin in order to be able to account for these potential challenges.

Adrian Rae · Answer

@Christopher Phillips If I'm interested in a property, and in this case the broker is the seller who listed it as a cash only purchase due to lack of comps, is it worth the effort of trying to find an appraiser who's willing to accept a similar-enough property to complete the appraisal? Apparently only one more comp is needed, and based off the listing the property actually appears to be listed well under value. I find this suspicious, but I am so new to this I really have no way to tell.

Adrian Rae · Answer

Ah, I gotcha. Thanks for the extra info!

Christopher Phillips · Answer

Appraisers are independently assigned through a vendor, so you can’t control how or why they select comps. Their clients (lenders) have particular parameters that they are looking for. As an example, many larger banks say that proximity to the subject is more important than finding similar matches at a distance or going back in time. Differences can always be adjusted. Others will allow for searches that go out further to find similar matches.

Adrian Rae · Answer

@Mike McCarthy thank you for inspiring me to google earth the address listing! (duh...newbie here) Sure enough, it is right next to a commercial retail business. It's also in a commercial zoning area, so perhaps a commercial loan could be a solve here. Either way, this smells like a similar situation that you found yourself in. But, the numbers say it has strong cash flows potential! Thanks for your thoughts on this one.

Adrian Rae · Answer

@Michael Seeker

1. Exactly, this definitely crossed my mind. But I've done some research on this town and I feel confident it's a strong market for long term appreciation. So I'd be interested in buy & hold, and my *assumption* is that many more multifam units will be built in the near future. I would never act on an assumption though, so your point stands.

2. I definitely need to look into this deeper. I've done a lot of demographic/economic research, but certainly need to dive into the demand for rentals. I can't say yes with 100% confidence.

3. Interestingly enough the agent on the listing is the current owner selling it, who is also the property manager and would/could remain as such under the new owner.

Thanks for helping me talk through these points!

Mike McCarthy · Answer

Interesting. If you believe the seller, there aren’t any similar MF in the area, which makes appraisals hard, but not impossible. They probably think it’s worth more than an appraiser would.

BUT... it would make me look a bit deeper into it. Is there another reason a bank wouldn’t lend?

A year ago I looked at a great little SFH, needed some work, had been on the market for a while, and was next to an auto repair shop (in a residential area). Neighbors confirmed the shop owners are nice, stop work at 5pm, aren’t especially loud, etc. Come to find out that it’s not able to get a conventional mortgage because it shares a wall with the garage. No bank will lend because of the risk/underwriting and some rules.

Could buy it with cash and would probably cash flow as a rental, but I’d have a lot of trouble selling down the road.

So definitely do your due diligence on this one!

Christopher Phillips · Answer

@Adrian Rae

If there aren't any sales comps within a reasonable distance or timeframe, then an appraiser would do a financial based model using the cash flow. It's not ideal with a 1-4 family, but in a small town there might not be many comps available at the time of the appraisal.

But, comps don't have to be perfect matches. If a 2-4 family home is 2,000 interior square feet in size, then another property of similar size might be used. I see this a lot with colonials that have been converted to have apartments in them, essentially 2 beds/1baths over 1 beds/1baths. So, it's still just a 3 bedroom colonial with an extra kitchen.

However, at the end of the day, it doesn't matter if you get a traditional loan vs. a private loan. It's still a loan. You just have to make sure that it still makes sense depending on the numbers.

Is this a red flag in a listing?

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