Rental Property Investor · Villa Rica, GA · Member since 2014 · 220 posts · 360 votes
Hey BP Fam!
I am in négociations over a quadplex. The comps for the quadplex is around 220k-250k. The owner is saying that the property will be valued off the income and potential income it will bring in. So he's saying he wants to sale at 288k. I'm thinking that when the property is appraised it will come back around 220k-250k. Should I let him know that I don't think it will appraise for 288k? or should I let him know I will buy at the appraised price. The numbers still work at 288k. Rents are 3200. Newer property. So will it appraise around where other quadplexes in the area sold for 220k-250k? or will income become a factor?
@Christian Estrella It would depend how your wrote it, but generally an appraisal contingency is intended to give the buyer downside protection. If it doesn't appraise, then they don't have to buy. If it appraises at or above the contract number then the buyer cannot back out (and the seller doesn't get any benefit from a traditional appraisal contingency).
I am an agent, not an appraiser - The appraiser will likely use both comparable sales and an income approach to value the property. If the property is newer/in better condition and the income is significantly stronger than the other comps, it could be enough to get it to appraise at the higher number.
If it works either way and you'd still buy it at the higher number, then just build an appraisal contingency into your offer as you have suggested. Don't say the price will equal the appraised number, just that it is 288k subject to appraisal at the purchase price. It seems unlikely it would come back at $325k or something, but you don't want to get stuck there.
I don't know the process in your state, but with a "normal" appraisal contingency if the number comes in short of the target it just gives the buyer an out, it doesn't bind the seller to whatever it came in at. You'd then have to amend the contract price. It is possible an attorney may be able to draft alternate language if both you and the seller are comfortable playing "appraisal roulette"
Let's say the appraisal comes in at 325K like your example, what happens then, can the buyer still back out, since the appraised price came in higher, or how does it work.
@Christian Estrella It would depend how your wrote it, but generally an appraisal contingency is intended to give the buyer downside protection. If it doesn't appraise, then they don't have to buy. If it appraises at or above the contract number then the buyer cannot back out (and the seller doesn't get any benefit from a traditional appraisal contingency).
A typical appraisal contingency allows the buyer to terminate the contract if the property doesn't appraise at the purchase price (at a minimum. If it appraises above the purchase price then the contingency is also satisfied).
A typical contingency does not set or amend the purchase price. I was just making a point that in trying to write a contract where the appraisal would set a purchase price (I have never seen one done this way), there could be an unintended consequence to consider.
If the property appraisal will be based on comps it will come in around 220-250k. The property is rented below market value so it has the same income. The seller was saying the appraiser will consider potential rental income. I wanted to tell him that isn't true but he's been investing for about 20 years but I'm almost sure this is his only multifamily.
If there are no like comps in the area the appraiser could use GRM to come up with a value of the property but you are saying there are comps so the appraisal should be closer to those numbers + or - some other variables.
@Dominique Palmer Thanks. The income isn't different either. I have a triplex that brings in 2000 and his quadplex brings in 2400. We are in the same area. I bought the triplex for 126 and put 15k into it to make it up to date. I just don't see how it could appraise for 288k. I think I am going to ask him would he be willing to sell for less if the property doesn't appraise for the amount he thinks it will.
Are you doing a residential loan or a commercial loan? Commercial will go off the income of the property, residential (up to 4 units) will go off comps.
Make your offer at the price you are willing to pay, and it would be smart to put in an appraisal contingency.
The appraiser should consider both comps and income and make their own decision on if the potential for increased rent would support a price higher than the available comps. They may or may not. It depends on the quality and amount of supporting information and their knowledge of the market.
It also, as noted, can depend on any lenders requirements, as the appraisal will be for the lenders use in deciding whether they want to make a loan in the property, and they can say they don’t want to consider any particular approach.
To put it another way, the seller is analyzing a deal to usually get the best price for himself. A buyer is analyzing a deal to usually get the best price for themselves. An appraiser is hired by the bank as an independent third party to estimate the most reasonable price the property would sell for between most buyers and sellers so they can judge how risky the loan is.
If they believe most buyers would factor the rent increases into the purchase price, then they should consider them...while fully disclosing the current income levels. The lender then can decide how much to lend and at what interest rate based on their underwriting standards for potential income.