Dear Real Estate Investors,
There is a lovely 3200 sqft. duplex for sale in Lehi, Utah currently renting below market value at $1200 per unit. 3 bed 2 bath per side (one unfinished bonus room per side too). The listing price was $650,000 the appraisal came back at $510,000!?!?! The duplex is rare as it was built in 1996 and the closet comp came in at 27 years older and 800 square feet smaller. We have $10,000 in earnest money that is now not refundable...but 10k is sure a lot less that the staggering $140,000 appraisal difference. I have never seen an appraisal value come in this far off. Any thoughts on this? What would you do? Buy or walk?
@Jay Gordet given those two choices I would walk.
@Jay Gordet Ask for a second appraisal from a different appraiser. Or potentially a different lending institution that uses a different appraiser. You might have to pay extra for a second appraisal, but worth it at this point. I would have your lender order it to make sure they can use that the appraisal can be used against the loan. If a second appraisal comes back low you can try to renegotiate the deal.
I'll second what Brady said, challenge the appraisal (get a different one), and/or renegotiate the offer. 10k is a lot of walk away from, I'd fight a little before simply walking.
I'm just over in Bluffdale. Were you looking to house-hack this duplex or is it purely investment?
We have been looking in the Utah valley as well. Personally I find that price really high for a duplex. I have seen them at the 500k mark recently. Are they not willing to come down to the appraisal price? It doesn't hurt to ask as you already committed your earnest money. It seems like you still might have cards on the table.
@Jay Gordet if you have better/more recent comps to justify the purchase price, you could try contesting the appraisal. I don't believe it's very common to have success with this, but an agent in my office recently pulled it off. The appraiser was using comps up to six months old in a market that has been appreciating around 4%/month, meaning those comps needed to be adjusted up by 24% to be in line with the current market. He made a packet for the appraiser demonstrating this and included info on 10 other offers the seller had received for the property that were close to the contract price. The appraiser adjusted the appraised amount closer to the contract price. I also had a deal recently that appraised $50k low and the parties agreed to split the difference. This triggered PMI for the buyer but they were able to prepay the PMI for a reasonable amount, something like $8k so they ended up ahead compared to paying original contract price anyway.
How does this make sense as an investment even at $510k if it's only generating $2400 in rent? How far exactly below market are the rents?
I'm not defending one position or another here but I would like to point out that the following statement assumes that the list price was correct and not the appraised value. “The listing price was $650,000 the appraisal came back at $510,000!?!?!”
Simply assuming that the real estate agent was correct and the real estate appraiser was incorrect is itself an incorrect assumption. Clearly somebody is way off and frankly, most likely it's the real estate agent. How do I know? That's easy, in order to become a real estate agent you have to be able to convert oxygen into carbon dioxide and get at least 70% correct on a multiple choice exam. To become a real estate appraiser, you have to take 150 hours of education plus 1000 hours of work experience plus you have to pass an exam that has a 60% passing rate. so question, which is more difficult to become? Real estate agent or real estate appraiser? And therefore, which of the two is more likely to be wrong? Probably the one who just had to pass a single exam…
Considering what is at risk here I would find another lender as soon as possible and get another appraisal done with a different appraisal management company. I'm sorry to say this and I'm sure you're thinking it, but $10,000 non-refundable is pretty risky and stupid. you may also want to consider getting a different real estate agent because this is a position that any real estate agent with any amount of experience would never let their clients get into.
@Jay Gordet looking at comps even if I go further out there is nothing to justify that value. The seller is trying to sell it at the value if the rent rates were at market rents not far behind. I think the appraiser is right and if the seller won't come down I would walk.
Originally posted by @Jay Gordet :
We have $10,000 in earnest money that is now not refundable...but 10k is sure a lot less that the staggering $140,000 appraisal difference. I have never seen an appraisal value come in this far off.
Why are you losing the earnest money? Did you waive the financing contingency? What about other contingencies, like inspection? Did the seller fail to disclose ANYTHING no matter how small?
To actually lose the money, both sides have to agree for escrow to release the finds. Until then, the house is still under contract and the seller can't sell to anyone else. This is a bargaining chip.
Sounds challenging to cash flow unless you double rents. Tough call but probably walk.
We have had similar challenges with our triplex.
When we had it built back in 2015, our first appraiser appraised it around $550k, we tried to contest the appraisal to no avail. We got a new lender, and a second appraiser and the appraisal came back around $575k. After calling the second appraiser and providing more details/information, we were able to get it readjusted to 600k so we could move forward with the project.
Last fall we started the refinance process, and the appraisal came back at $540k (🤯), we again tried to contest but didn’t get anywhere. We tried to get the bank to allow us to get a second appraisal but the bank wouldn’t have been able accept the new appraisal. We went to a second bank and got a new appraisal and it came back at $630k. (The property is realistically worth significantly more, but that’s a story for another day)
The takeaway, with multifamily properties since they rarely hit the market in smaller markets, appraisals can very significantly. It’s definitely worth the $500-800 to get a second appraisal.