Property appraised for less than anticipated

[Jessica M.]

Hi All,

My husband and I are partnering up with another investor and are about to take on one of our first deals, besides renting out our primary residence. We are purchasing a townhome in an urban area. The agreed purchase price is 115k. The property appraised for 190k. We are using a HML, which will only give us 65% of appraised value, which is about 123k. We are trying to limit any out of pocket investments to minimize our risks. The property next door, fully renovated, just sold for 220k.

It would cost about 40k to make our property look as good. In your opinion, would you:

A. use the 8,500 dollars to do light Reno's and rent it out for a year. Have it reappraised, hoping the market price increases more, then do the larger renovation?

B. Suck it up and come out of pocket for full renovations then sell and cash out?

I welcome all advice! Thank you!

Thank you!

[Alex Sanciangco]

Without diving too much into the numbers, my initial thoughts are you could also

C. Bring on another capital partner for this deal to cover the gap and receive some of the profits, or

D. Find a private lender to cover the gap (ideally with favorable terms!)

I would definitely be cautious about “sucking it up” just to make the deal work - if the numbers work out then go for it, but if it’s too much risk than you’re comfortable with then you’re better off being patient and passing on the deal. 

There’s also an option to combine some of the above: bring in some of your own capital then cover the remaining - now smaller - gap from a private lender or additional partner.

Again, it all comes down to the numbers and the affected parties’ risk tolerance. But especially for your first deal I wouldn’t take unnecessary risk just to make it work unless you can tolerate a worst case scenario.