3-unit mfh severely underappraised
Member since 2023 · 29 posts · 10 votes
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
Normally I would say dispute the appraisal but if comps support the apppraisal then the appraisal s accurate.
I do not understand why you would want to pay over retail. The $39k negative initial position would consume years of cash flow. From an accounting perspective, the initial cash flow does not occur until the negative position is recovered.
I highly suspect my underwriting would not show $700/month cash flow with 80% LTV loan at current rates. However, using your cash flow numbers it 55.7 months to recover the negative position. So over 4.5 years. To place this in a different light, I have never not recovered my investment in more than 5 years (mostly I have done it in less than 2.5 years).
This is an absurd purchase. I question if any successful RE investor will disagree with my statement. Do yourself a favor and walk if the seller is unwilling to drop to virtually appraised value.
Also, I do not believe anyone who has cash to purchase would even pay $138k (they would have to be very inexperienced). Anyone who finances will encounter the same issue with the seller requesting far over value for his property.
Are you going to BPcon? If this closes at over $170k in next 90 days, I will treat you to burgers, fries, and soda at BPCon and we can discuss my wrong forecast over lunch at my treat.
Good luck
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
My experience has been that even if you have a second appraisal, most lenders will base their lending decision on the lower appraised value. And all the more so if, as you mentioned, the comps support the $138K appraised value. If obtaining the cash difference is not an option, you may ask the seller to lower the price to match the appraised value.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
My experience has been that even if you have a second appraisal, most lenders will base their lending decision on the lower appraised value. And all the more so if, as you mentioned, the comps support the $138K appraised value. If obtaining the cash difference is not an option, you may ask the seller to lower the price to match the appraised value.
Thanks for the input. Tried that. They have cash offers waiting in line if my deal falls through. So they're only willing to budge 5K, which doesn't do much for me.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
I'm trying to understand why you would purchase a property so far over appraisal if there aren't supporting comps? It sounds like you are overpaying unless I'm missing something. Also I would be suspect that they have cash offers. If the offers were close most sellers would take a slightly lower cash offer over having to deal with a mortgage.
Sometimes a bad appraisal ruins a decent deal, sometimes it stops you from making a bad deal.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
I'm trying to understand why you would purchase a property so far over appraisal if there aren't supporting comps? It sounds like you are overpaying unless I'm missing something. Also I would be suspect that they have cash offers. If the offers were close most sellers would take a slightly lower cash offer over having to deal with a mortgage.
Sometimes a bad appraisal ruins a decent deal, sometimes it stops you from making a bad deal.
The reason is cashflow. The triplex cashflows at +$700/mo, and that's a very conservative number.
But to more closely answer your question, I'm not purchasing a property so far over the appraised value. I want to ensure that 1) the appraised value is accurate, and 2) I want to determine if there is a workaround since this is my first go-round.
The work around has always been the same. The seller lowers the price or the buyer brings more cash to the table. SOMETIMES/MAYBE if your offer is waaay higher than the 2nd best offer the seller might carry some of the difference for a year, maybe 2? But you’d have to be 10% higher than the 2nd best offer.
Borrow the diff with a credit card, a heloc against your primary, from a work 401k? These are all assuming your DTI isn't borderline and the extra debt won't kill your loan. A lender isn't going to take the Bette or two appraisals, they're going to take the lower of any 2. maybe find a a partner with cash on hand to split the deal 50/50? PROBABLY Better than losing it.but make sure you write out every contingency regarding someone wants to sell, someone wants to upgrade units, someone wants a fancy pair and the other wants a bandaid, etc etc.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
Normally I would say dispute the appraisal but if comps support the apppraisal then the appraisal s accurate.
I do not understand why you would want to pay over retail. The $39k negative initial position would consume years of cash flow. From an accounting perspective, the initial cash flow does not occur until the negative position is recovered.
I highly suspect my underwriting would not show $700/month cash flow with 80% LTV loan at current rates. However, using your cash flow numbers it 55.7 months to recover the negative position. So over 4.5 years. To place this in a different light, I have never not recovered my investment in more than 5 years (mostly I have done it in less than 2.5 years).
This is an absurd purchase. I question if any successful RE investor will disagree with my statement. Do yourself a favor and walk if the seller is unwilling to drop to virtually appraised value.
Also, I do not believe anyone who has cash to purchase would even pay $138k (they would have to be very inexperienced). Anyone who finances will encounter the same issue with the seller requesting far over value for his property.
Are you going to BPcon? If this closes at over $170k in next 90 days, I will treat you to burgers, fries, and soda at BPCon and we can discuss my wrong forecast over lunch at my treat.
Good luck
The value of a property is what someone is willing to pay for it. If you are confident in your numbers and have someone review and come to the same conclusion, it can be a worthwhile investment if you are planning for a long hold period.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
That's a pretty big gap. Additionally, prices are on their way down given what has happened with interest rates. So the size of the gap is even more telling given the fact that the comps the appraiser is using are likely a bit puffed. It's pretty clear this property's true value is a lot closer to $138k than it is to $177k.
Focus on your COC return numbers. Of course we always want the best of both worlds but you now need to decide if your buying for equity or rent returns. Don't let the fact that someone else is willing to overpay influence your numbers and your wallet. Is the inspection clean? Is $700 cash flow really enough if something goes wrong? A triplex in Cleveland at that price can't be new (I'm assuming). If the appraisal is solid & thorough then it may be telling you something.
If there are no comparable sales with a loan in past three months you need to cancel ASAP and get your EMD back. Your agent should have run comps before you made the offer. This gap is too wide to make it work.
Ignore listing agent saying they have cash offers for full price.
$1295 is approx PITI what are the market rents not what the seller claims?
If you don't have the money to make up the gap and seller won't come down, move on fast. You will not have the reserve cash you need to repair anything, deal with slow pay tenant, pay for life's problems.
I would tell them to lower their price or back out of the deal. Now they also have an appraisal at that value so if anyone asks if the property has been appraised they have to say yes and that value will come out.
If they have people who are willing to overpay in cash for it then let them. But likely if they had cash offers competing with yours to begin with they should have taken those over yours.
Submit a notice to cancel and hopefully your deposit isn't nonrefundable at this point.
What kind of financing are you getting? FHA, you're stuck with the appraisal.
If its another type of loan, you'll want to look at the appraisal in great detail. The lender may not allow you to just order an another appraisal if the comps are reasonable. You'll need to sell the appraiser on why the property is worth more.
See if there are any erroneous adjustments for condition, sqft, etc. If there's opportunity to make up some value in the adjustments, it could help bridge that gap. The next thing you want to do is try to find comps that may be slightly over on the parameters (i.e. extra bedroom or sqft, pool, etc). If they're at higher price points, perhaps the appraiser is willing to adjust downward.
Without justifiable reason to dispute/order another appraisal, its going to be difficult without receiving credits from the seller or coming up with the extra cash.
Perhaps syndicating the remaining funds or getting a piggyback second will help keep the deal alive.
Good luck!
I just can't believe you can buy a triplex for 177k!
I just can't believe you can buy a triplex for 177k!
Cleveland market, sir. There are currently 32 multifamily homes in that price range.
I believe I found the home you are under contract.
It's green with new carpet, windows, granite countertops, cabinets, etc. All with the protective film still on it. Looks like they went with the ultra cost effective route on upgrades but they're still upgrades.
They purchased it for $55k in 06/22 and they want $177k now for the updates + profit.
Questions:
1) Is that a beam of marble or a beam of wood at the bottom of the tub? If marble, looks like a scrap piece. Not knocking it but I bring this up as potential clues to the quality of their work.
2) Will the lender approve your loan if the appraisal is that much less than asking?
3) When interest rates lower in a few years, will you be able to refinance it as you may be underwater on your loan?
With that said..
1) Is getting another appraisal with it knowing that you've seen comps lower too?
My vote is "No". That's the appraised value, even with their upgrades. They probably put it up on the market thinking this is what their sweat equity is worth.
2) Cash flow +700/mo conservatively? Take into account repairs + maintenance.
This market appreciates slowly. When you sell it, it may go for under this purchase price.
Personally, I would state "I can't go beyond the appraised value" and otherwise walk.
However, if you're getting it solely for monthly cash flow and are ok with the risks (underwater loan, can't recoup when selling, etc), then proceed and enjoy your first rental!
I just can't believe you can buy a triplex for 177k!
Cleveland market, sir. There are currently 32 multifamily homes in that price range.
I believe I found the home you are under contract.
It's green with new carpet, windows, granite countertops, cabinets, etc. All with the protective film still on it. Looks like they went with the ultra cost effective route on upgrades but they're still upgrades.
They purchased it for $55k in 06/22 and they want $177k now for the updates + profit.
Questions:
1) Is that a beam of marble or a beam of wood at the bottom of the tub? If marble, looks like a scrap piece. Not knocking it but I bring this up as potential clues to the quality of their work.
2) Will the lender approve your loan if the appraisal is that much less than asking?
3) When interest rates lower in a few years, will you be able to refinance it as you may be underwater on your loan?
With that said..
1) Is getting another appraisal with it knowing that you've seen comps lower too?
My vote is "No". That's the appraised value, even with their upgrades. They probably put it up on the market thinking this is what their sweat equity is worth.
2) Cash flow +700/mo conservatively? Take into account repairs + maintenance.
This market appreciates slowly. When you sell it, it may go for under this purchase price.
Personally, I would state "I can't go beyond the appraised value" and otherwise walk.
However, if you're getting it solely for monthly cash flow and are ok with the risks (underwater loan, can't recoup when selling, etc), then proceed and enjoy your first rental!
Yeah you summed it up. And yes, you found the property. I am in it for the cashflow. That's my strategy. Cashflow on property #1, equity purchase on property #2, and then move on to #3 soon after.
1. That's a piece of wood.
2. The loan is approved for the appraised value. If I want the place, the difference bw the loan and the sellers price is all on me.
3. At the current price we're looking at negotiating (155K), it'll take 6-7 years to break even on equity, since this won't really appreciate.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
I'm trying to understand why you would purchase a property so far over appraisal if there aren't supporting comps? It sounds like you are overpaying unless I'm missing something. Also I would be suspect that they have cash offers. If the offers were close most sellers would take a slightly lower cash offer over having to deal with a mortgage.
Sometimes a bad appraisal ruins a decent deal, sometimes it stops you from making a bad deal.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
Are you getting advice from your agent and lender? There are some really great strategies available to you when you get a low appraisal- that can truly be a gift if you know how to work it.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
Are you getting advice from your agent and lender? There are some really great strategies available to you when you get a low appraisal- that can truly be a gift if you know how to work it.
I'm in contact with them daily, but as for advice, the conversations are more like "What do you want to do in this situation, Cole?"
I like my lender and my agent - especially my agent. But I do get a sense that more experience could have made this a lot smoother.
Good feedback about the influence of the actual purchase and the appraiser on the value of the property.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
Are you getting advice from your agent and lender? There are some really great strategies available to you when you get a low appraisal- that can truly be a gift if you know how to work it.
I'm in contact with them daily, but as for advice, the conversations are more like "What do you want to do in this situation, Cole?"
I like my lender and my agent - especially my agent. But I do get a sense that more experience could have made this a lot smoother.
Good feedback about the influence of the actual purchase and the appraiser on the value of the property.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
I'm trying to understand why you would purchase a property so far over appraisal if there aren't supporting comps? It sounds like you are overpaying unless I'm missing something. Also I would be suspect that they have cash offers. If the offers were close most sellers would take a slightly lower cash offer over having to deal with a mortgage.
Sometimes a bad appraisal ruins a decent deal, sometimes it stops you from making a bad deal.
The reason is cashflow. The triplex cashflows at +$700/mo, and that's a very conservative number.
But to more closely answer your question, I'm not purchasing a property so far over the appraised value. I want to ensure that 1) the appraised value is accurate, and 2) I want to determine if there is a workaround since this is my first go-round.
Cleveland is a great market for cashflow! This sounds like a good investment... but you make money when you buy, not when you sell. Good cashflow doesn't necessarily justify overpaying $40k, in my opinion.
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
Are you getting advice from your agent and lender? There are some really great strategies available to you when you get a low appraisal- that can truly be a gift if you know how to work it.
I'm in contact with them daily, but as for advice, the conversations are more like "What do you want to do in this situation, Cole?"
I like my lender and my agent - especially my agent. But I do get a sense that more experience could have made this a lot smoother.
Good feedback about the influence of the actual purchase and the appraiser on the value of the property.
Fantastic advice. Thank you, mate!
Under contract for a 3-unit mfr in Cleveland. My first purchase.
Purchase price is 177K.
Appraisal is 138K.
I cannot make up the difference with cash since I'm already at the top end of my purchasing ability.
Is ordering another appraisal worth it? Comps in the area seem to support the appraised value...
I'm trying to understand why you would purchase a property so far over appraisal if there aren't supporting comps? It sounds like you are overpaying unless I'm missing something. Also I would be suspect that they have cash offers. If the offers were close most sellers would take a slightly lower cash offer over having to deal with a mortgage.
Sometimes a bad appraisal ruins a decent deal, sometimes it stops you from making a bad deal.
The reason is cashflow. The triplex cashflows at +$700/mo, and that's a very conservative number.
But to more closely answer your question, I'm not purchasing a property so far over the appraised value. I want to ensure that 1) the appraised value is accurate, and 2) I want to determine if there is a workaround since this is my first go-round.
Cleveland is a great market for cashflow! This sounds like a good investment... but you make money when you buy, not when you sell. Good cashflow doesn't necessarily justify overpaying $40k, in my opinion.
I'm with you 100% on this.
I just can't believe you can buy a triplex for 177k!
Most people in Cleveland buy them for about $138k lol
Having an exposed, untreated 2x4 at the bottom of a bathtub for molding/support is not good at all. That will warp/rot pretty quickly. If they did that, I question their workmanship mentality elsewhere.
Poor build quality means surprise repairs, sometimes simultaneous. Again, speaking from experience on this.
Did the appraiser verify it was truly a triplex and took that into account on its evaluation or did he simply compare it to other duplexes?
I’ve been in homes where they say it’s a triplex but it’s an attic where you can barely go in with a mattress on the floor and vented port holes.