Pay over the appraised value?

Multi-Family and Apartment Investing
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Pay over the appraised value?

Ema SilvaPro Member
Boston · Member since 2021 · 10 posts · 0 votes

Should I pay an extra 30k above the appraised value? It is multifamily. After said expenses, fixed and variable, it would net 2k a month. The CoC is 34% and the cap is 7.6%.

I just dont feel good about paying an extra 30k above appraised value in a market like this. Thoughts?

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Arn CenedellaPro Member
Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
4y

@Ema Silva

Based on over 40 years in the real estate industry, I can tell you in my opinion many people overestimate the value and accuracy of an appraisal.

If you were to get three appraisals on this property (providing no purchase agreement), you would probably get three different values. The idea of no purchase contract is to force appraiser to determine a value independent of any sales price to aim for.

Appraisals often will have a range of error of +-3%. Market value is a range of values not a specific number.

What’s the purchase price? $30,000 on a $300,000 deal is a much different issue than $30,000 on a $1,000,000 deal.

The “low” appraisal would make me take a second and third look at my underwriting. What am I missing? What does the appraiser do differently than I?

The other factor is: How hot is your market? if the subject property is in some for lack of a better word “podunk” town where population jobs and values are stagnant, the $30,000 would be of great concern. If on the other hand, your market is super hot, that $30,000 could be made up in six months appreciation.

I can tell you in any growth market of the country, if someone bought in March 2021, and thought they overpaid……I can tell almost without exception, those buyers are ecstatic they bought in March and overpaid because the value of their property probably has increased in 6 months by way more than $30,000.

Real estate investments for me is a long term game. I look to the future more than the immediate present. I look at overall future prospects of that market.

The great thing about investing is it is easy to talk a good game. Investors have to put their money where their mouth is - so it’s real, it’s not hypothetical.

Can’t tell you what to do. Hopefully, my thoughts present a different perspective.

Good luck!

[email protected]650-575-6114
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  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    4y

    Nobody can tell you what to do without all of the information. Does it meet your criteria of a good deal? If not, offer them the price that meets your criteria. If yes, do it. It's not an emotional decision. The deal either makes sense to you or not. Can you lose money on this deal? That is what I ask myself.

    3Reply
  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    4y

    If you don't feel good about it, why are you asking if you should do it? Don't you think you can find other deals where you don't have to pay 30k out of pocket and that 30k could go to repairs on the property that you won't have. Why would you do it? Why would you overpay 30k on an investment property? And are you sure your cash flow is going to be 2k a month? Are you paying cash? You might want to toss out your numbers on that one to be sure.

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  • Danielle Jackson
    Phoenix, AZ · Member since 2021 · 504 posts · 282 votes
    4y

    I think in this case, your gut is telling you this isn't the right deal. There is a lot of information we aren't privy to based on this post, so hard to give advice either way. $30k isn't an insignificant sum of money, but what is the potential upside (growth market?), are you paying for turn-key, what are you including in your cash flow model (costs) and finally.....are you putting yourself in a position where you aren't building (or able to build in) an operating buffer for vacancies, repairs, etc. 

    Either way, there are certainly good deals out there. If this doesn't pencil out, then move on to the next property! Good luck. 

    1Reply
  • Deanna O.
    Rental Property Investor · San Diego, CA · Member since 2010 · 366 posts · 314 votes
    4y

    What is the actual sticking point of the "extra" $30k?  Is coming in with the additional $30k cash the issue? Does it feel like you are somehow getting cheated because the price is higher than the appraisal?  Is the appraisal actually low, or is it just that it doesn't reflect the current (possibly inflated) market? The deal might still make sense because of the lower overall holding costs due to low interest rates, but there you definitely pay extra to buy during a hot market. 

    0Reply
  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    4y

    @Ema Silva

    Based on over 40 years in the real estate industry, I can tell you in my opinion many people overestimate the value and accuracy of an appraisal.

    If you were to get three appraisals on this property (providing no purchase agreement), you would probably get three different values. The idea of no purchase contract is to force appraiser to determine a value independent of any sales price to aim for.

    Appraisals often will have a range of error of +-3%. Market value is a range of values not a specific number.

    What’s the purchase price? $30,000 on a $300,000 deal is a much different issue than $30,000 on a $1,000,000 deal.

    The “low” appraisal would make me take a second and third look at my underwriting. What am I missing? What does the appraiser do differently than I?

    The other factor is: How hot is your market? if the subject property is in some for lack of a better word “podunk” town where population jobs and values are stagnant, the $30,000 would be of great concern. If on the other hand, your market is super hot, that $30,000 could be made up in six months appreciation.

    I can tell you in any growth market of the country, if someone bought in March 2021, and thought they overpaid……I can tell almost without exception, those buyers are ecstatic they bought in March and overpaid because the value of their property probably has increased in 6 months by way more than $30,000.

    Real estate investments for me is a long term game. I look to the future more than the immediate present. I look at overall future prospects of that market.

    The great thing about investing is it is easy to talk a good game. Investors have to put their money where their mouth is - so it’s real, it’s not hypothetical.

    Can’t tell you what to do. Hopefully, my thoughts present a different perspective.

    Good luck!

    [email protected]650-575-6114
    4Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    As others have stated, there really isn't a lot of information to go on. Where is the property located? What condition is it in? What repairs are needed? What are the comps looking like? What is your strategy for the property? How many units is it? What is the purchase price?

    You may not feel good about paying an "extra" 30k, but do you feel good about the deal itself? Just remember this: deals that looked outrageous and overpriced 5-7 years ago look like steals in todays market. 

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    4y

    Get a new appraisal 

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  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    @Ema Silva how do you get a 34% CoC with under an 8 CAP?

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  • Ema SilvaPro Member
    OP
    Boston · Member since 2021 · 10 posts · 0 votes
    4y

    @Matthew Irish-Jones I am using FHA.

    0Reply
  • Ema SilvaPro Member
    OP
    Boston · Member since 2021 · 10 posts · 0 votes
    4y

    Thanks @Arn Cenedella that info is very helpful. The property is valued at 870k and the owner wanted 930k. We have settled on 900k being the number that we are both comfortable doing. I spoke to two other real estate professionals about the deal and they it is too overpriced for the market and that I am already buying at the top of the market, so why would I overpay on top of that. The feedback had me seek out more perspective. I believe that there will be no appreciation in the next several years. This market exploded and values have nearly doubled since 2015. That being said, I am buying this one for cashflow and using FHA.

    0Reply
  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    4y

    @Ema Silva

    I’m confused. Something doesn’t quite add up here.

    Since you are using FHA I assume the following:

    1. This is a 2 to 4 unit deal.

    2. You will occupy one of the units as FHA is for owner occupants only.

    Are your return calculations based on you living in one unit with no “income” for that unit?

    3. FHA's biggest benefit is low money down.

    What’s your down payment?

    If the market has doubled in 5 years, why do you believe appreciation will end?

    What’s changed with the area to indicate there will be no more appreciation?

    So if in fact, you can buy this property with little or more money down and get a 34% annual cash on cash return, why wouldn’t you buy it?

    In 3 years, you get all your cash back and own a cash flow property.

    Most investors would jump for joy for a deal like this.

    Just trying to help with the analysis………..

    But I am skeptical one can buy with FHA financing at an 8% cap and get a 34% cash on cash return……

    And if you could, why wouldn’t you?

    [email protected]650-575-6114
    1Reply
  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    @Ema Silva if you are getting a 34% CoC and this is a long term buy and hold… who cares if you are overpaying? Do you think it will be worth less on 20 years?

    In the meantime you are getting a 34% return on your money. Where else can you do that? That number still seems to high, how are you calculating?

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  • Ema SilvaPro Member
    OP
    Boston · Member since 2021 · 10 posts · 0 votes
    4y

    @Arn Cenedella I am factoring the rent for the unit I would be living in because the way I see it is that instead of being 2.1k for rent, I am saving 2.1k. Eventually when I move out, it will be money that I am receiving. It is a 3 unit but being used as a 4. I've factored in PMI, taxes, insurance, 3.5 vacancy rate, 3.5 Capex, 3.5 maintenance, water, electric, interest. This is a turnkey property being rented at market rates with no room for increase.

    0Reply
  • Ema SilvaPro Member
    OP
    Boston · Member since 2021 · 10 posts · 0 votes
    4y

    @Matthew Irish-Jones The numbers seemed too high at first to me as well, but I went over the numbers a few times and I am factoring all the expenses. The property is a legal 3 family and is being appraised as such. There is a finished unit in the basement that they are renting out. When they first put it on the market, they received offers over a million. However with the appraisals coming back at around 870K, no one was interested in covering the difference with the appraisal. 

    0Reply
  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    @Ema Silva

    Not sure what a better use of your money would be if you are getting 34% cash on cash return.

    May want to check the basement is a legal unit and there is a C of O. Not sure what the legalities are in your area.

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  • Patrick FitzgeraldPro Member
    Investor · Member since 2019 · 19 posts · 16 votes
    4y
    Originally posted by @Arn Cenedella:

    @Ema Silva

    I’m confused. Something doesn’t quite add up here.

    Since you are using FHA I assume the following:

    1. This is a 2 to 4 unit deal.

    2. You will occupy one of the units as FHA is for owner occupants only.

    Are your return calculations based on you living in one unit with no “income” for that unit?

    3. FHA's biggest benefit is low money down.

    What’s your down payment?

    If the market has doubled in 5 years, why do you believe appreciation will end?

    What’s changed with the area to indicate there will be no more appreciation?

    So if in fact, you can buy this property with little or more money down and get a 34% annual cash on cash return, why wouldn’t you buy it?

    In 3 years, you get all your cash back and own a cash flow property.

    Most investors would jump for joy for a deal like this.

    Just trying to help with the analysis………..

    But I am skeptical one can buy with FHA financing at an 8% cap and get a 34% cash on cash return……

    And if you could, why wouldn’t you?

    Speaking the truth

    0Reply
  • Patrick FitzgeraldPro Member
    Investor · Member since 2019 · 19 posts · 16 votes
    4y

    House hack with a 2k a month cash flow, thats over a 30% coc return. Come on man!

    0Reply
  • Matt Groth
    Contractor · Grand Marais, MN · Member since 2016 · 249 posts · 417 votes
    4y

    @Ema Silva appraisals are for banks, and of passing interest for investors. If the appraisal was 50k higher, would you be happy? The appraisal has 0 impact on cashflow. It is a snapshot of 1 day in time, made by 1 person.

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    4y

    so the market is telling you it is worth more than you are paying and yet you dont believe the appraisal that came in lower that what the market says its worth? 

    Do you have the extra 30k to put in? do You have enough reserves after paying the extra 30k in cash? 

    It sounds to me that a shift in perspective might be needed...... much of the math done here on BP is for flips - not long term holds.... shift your perspective and see if it makes sense. Learn about IRR.... also use commercial cash flow projections (Proforma) and not SFH projections.... you can find example on google.... here is a random example from google https://propertymetrics.com/bl...

    0Reply
  • Hersh ShahBusiness Member
    Realtor · Atlanta, GA · Member since 2016 · 120 posts · 79 votes
    4y

    You are using FHA and taking advantage of a low down payment option with the caveat that you have to bridge the appraisal gap of $30k for you to realize 34% COC return. At a $900k price point, that is a 3.3% premium that you are paying which in the grand scheme of things is minimal considering your returns.

    I have investors making offers at 10% over list and willing to bridge appraisal gaps entirely to be able to make a modest cash on cash return while paying 20-25% down.

    I don't have a ton of info, but it seems like this is a home run. If you don't have the 30k or dont want to spend it up front in order to get the deal done, ask the seller to carry it for 18 months and pay him from your cash flow until it is paid off.

    Don't make it binary. Find a way to get creative and get it done.

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  • Bud Gaffney
    Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
    4y

    No.

    0Reply
  • Ema SilvaPro Member
    OP
    Boston · Member since 2021 · 10 posts · 0 votes
    4y

    @Hersh Shah Thanks. Great info

    0Reply
  • David Bilandzija
    Lender · Venice, CA · Member since 2021 · 189 posts · 132 votes
    4y

    Can you find that kind of return elsewhere in your market? In other words, what are the alternatives.  Look at your deal from a global perspective how does it stack up to what's available around you.  You might find that the 30k difference is nothing more than a distraction.   

    0Reply
  • Ema SilvaPro Member
    OP
    Boston · Member since 2021 · 10 posts · 0 votes
    4y

    @David Bilandzija Thanks for the perspective. I'm moving forward

    0Reply
  • David Bilandzija
    Lender · Venice, CA · Member since 2021 · 189 posts · 132 votes
    4y

    @Ema Silvadon't forget to update us in the future on your fruitful decision.  Congrats and best of luck to you Sir!

    0Reply
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