Last night the appraisal came in ahead of my first deal. The property was valued at $153,000. My offer was $178,000. The 2010 appraised value was $172,000; rent has increased and they've made improvements to the property since then.
The seller is a friend of my mothers. She's been my mentor and was going to be my property management as well.
Is there anyway that I can still make this deal work? I live overseas so maintaining this relationship is especially important to me. Nevertheless, I don't want to start my investing career with a poor buying decision.
I would really appreciate if anyone could steer me in the right direction.
@Matt E. , how are you financing the deal? If you are getting a loan, are you willing/able to come up with additional money upfront to make up that difference? It will significantly alter your return.
You're free to pay your offer price regardless of appraisal value, as long as you have the cash to make up the difference. But why would you? Do you really think the seller has other buyers with cash willing to buy over appraisal. Rewrite your offer to the appraisal amount. Or if you like the cash flow at $178K and don't mind not having any equity, then pay her your original offer. But I'm wary of a mentor that would let you do that. Is the property turn-key? Something the seller sells with tenants in place and manages for you?
The 2010 appraisals have nothing to do with anything. Your mentor should have taught you that already. :)
I totally agree " Do you really think the seller
has other buyers with cash willing to buy over
appraisal. Rewrite your offer to the appraisal amount "
Jenkins Ramon, JMWPS Ventures, LLC | [email protected]
@Brett Russell Thank you, Brett. I'm financing the property with a 30 year 5/1 ARM starting at 4.75%. I can come up with the extra cash but I feel like I'd be a fool for doing so.
Can she hold a second for you on terms that make it work?
@ K. Marie Poe Thank you for your advice! Yes, the property is turn-key with long term residents in place. She would manage; her contractor would continue with maintenance.
It's good to know that the 2010 appraisal does not mean anything.
@Jenkins Ramon I definitely don't think anyone would pay 25,000 cash over appraisal. I don't even like the idea of paying a few thousand cash over that amount.
She and her partner have a 1031 exchange lined up. I was hoping to compromise somewhat on price because of all that she has done for me, but man, this comes to a surprise.
I truly admire all of you who are able to succeed in this business. Thank you so much for your guidance.
@ Mike M. Thanks. Does that mean a second loan from the seller?
@Matt E. Yes, if she'll hold a second mortgage it may help make up the difference if you really still want the property.
Have you reviewed the appraiser's comps? Are they reasonably equivalent to the subject property? It's highly unlikely the appraiser would change his/her mind based in info you provide, but it may help you determine your comfort level with paying more than appraisal.
@ Mike M. I will look at the comps again over the weekend. Initially they look very reasonable. I don't feel comfortable paying more than appraisal. I'll let her know that.
Thank you for mentioning the option of owner-financing.
Don't let your seller's 1031 exchange plans influence anything. Unless this property has smoking cash-flow that is extraordinary for the market, don't pay over appraisal amount.
There are times when paying over appraisal makes sense. I'm pretty sure this isn't one of those times.
What type of property are you looking to buy and what city is it located in?
If it is a single family and you pay 25k over market value you will have limited exit opportunities available. Also I would think that it would be pretty difficult to earn reasonable return at that price level.
The other item that would concern me is the method you plan on using to purchase the property. A 5/1 arm at 4.75% could be much more expensive when looking to refinance when the term is up.
Property taxes are rather high here as well. Just make sure you work all the numbers out and if the deal makes sense you can move forward with it but if this your first deal and you haven't looked at numerous other opportunities I would hold off.
the 1031 should be no concern of yours and frankly I would be a bit skeptical if someone I knew was willing to sell me a property at 25k over appraisal and then manage it (presumably for $$$) I would definitely wonder if this is first out of area investment in real estate that I would like to make :)
@ K. Marie Poe Thank you! No, the cash-flow is not out of the ordinary. You're right. The seller is a reasonable person--if she were in my place she wouldn't being paying the extra cash.
Thanks again. It's so nice to be able receive thoughtful input before I make a decision.
I am an appraiser and investor. I would run the other way if your mentor is trying to get you to purchase a property 25k over the appraised value. You should be looking for something 25k under the appraised value. Also having long term renters in there that you plan to keep might very well cost you money as they are more then likely paying less than market rent. I would look for a better deal.
@ James Gefke
Thank you for your response. It's 3 unit multi-family in Steven Point. If I were to overpay by 25,000, I can't imagine an outcome that I wouldn't be losing money in the end.
I initially applied for a 30 year fixed loan but the bank could only offer me and adjustable rate in-house loan because the address I list on my tax returns is overseas.
@ Beau Ryan
Thank you for your suggestions. The seller was disappointed that the appraisal was low and she acknowledges that this was a game changer. She's not a person who would take advantage of me; she just wants to get out what she's put into the property.
After everyones's input, I clearly understand that overpaying would be a mistake. I trust people, but that doesn't mean I won't do my homework.
@K. Marie Poe
Taking all of your advice, I told the seller that I didn't feel comfortable purchasing above the appraised value. She asked if I was willing to "take an average" between the old and new appraisals and suggested the price of 160,000 or 165,000. That's 7,000 to 12,000 extra in cash. Awhile back, I had expressed an interest in buying one of her flips and a different property as well. She mentioned reducing the price on these a bit for me if I was interested in the future in exchange for paying "a bit more" this time.
I know, it sounds like a used car salesmen pitch to sell me a lemon. I still want to trust her, admittedly with some skepticism. Since she would become my property manager, I thought about negotiating on price if she could operate the property with a reduced property management fee over a period of years. In the end, I may just have to pass.
Yes, it's about money and basic principles for buying real estate as an investment. But it's also about character. If the person who I've considered a mentor does not have my best interests at heart, it's time to part ways. Since I'm trying to do this internationally it's so important to me that I have people I can trust. And no one wants to feel taken advantage of.
If my thinking is all wrong, you would being me a huge favor by hitting me over the head with a big inflatable hammer that squeaks. Maybe they only sell those here.
I'm having a hard time with the seller's suggestion of averaging between a 2010 appraisal and today's appraisal. The 2010 appraisal is irrelevant. Why not use one from 2007? By asking you to pay "a bit more" on this one so she can give you a deal in the future, she's admitting this isn't a good deal at her revised asking price.
IMO, either she doesn't know anything about valuations, or she is grasping at whatever will get you to pay more than appraisal. Either way, it doesn't look like someone I'd want as a mentor or property manager. She is assuming or knows you have cash to make up the difference, which is why I think she's staying in negotiations to get you to pay more. If it's a great deal at her asking price, then she'll have no problem finding another buyer if you don't buy it.
You don't have to judge her character here. People do business in ways that aren't a match for everyone without it meaning they are out to take advantage. That being said, her push on value would make me rethink the entire deal. Are the recent improvements overstated, are the rents and tenants as solid as she represents. Is her property management what she says it is.
I would not buy it over appraisal price.
@K. Marie Poe
Thank you very much for taking the time to write. Your thoughts are helping me get my head around this. You are right that she knows I have cash. She also knows how very new I am at this. She has a business partner and she wants to close on a property at the end of the month--I assume that's why she is working hard to get me to negotiate. I don't think she realizes that I have the opportunity to access people who know the business on biggerpockets.
Thank you again for helping me make an informed decision.
I took all of your advice to heart and let the seller know that I won't pay more than appraised value. Thank you for helping me make the right decision and potentially saving me from many sleepless nights!
Back to the drawing board. I can still afford to buy beer and cheese curds in Wisconsin. Life is good.
@Matt E. Good decision. And without judging her as a person, a mentor who would try to pawn off one of their losers to you at your expense is not much of a mentor nor potential business partner/associate. I would be looking elsewhere.
@Walt Payne Thanks for your words of support, Walt. And I appreciate how you worded your advice. She's not a bad person. I was really excited to finally be getting into the game but I know the decision had to be made. I look forward to giving it another try next time.
After writing back to say that I wasn't willing to pay more than appraised value, her proposal was to sell me the property at appraised value with the commitment that I would also agree to buy her next property at 135,000-150,000 in a few months time (a flip with "tenants lined up") ...
At this point, I am hesitant to even write an offer for the appraised value.
@Matt E. At the risk of sounding like someone's mother by repeating myself.......Do not commit to buy a future deal from this person! Or anyone for that matter. Buy this property only if you want it at appraisal price and you are sure you want her as the PM. And if not, make sure you have an easy and affordable way to break the PM agreement and go with someone else. This hard sell in the buying process doesn't bode well for your future with her as the property manager. Just saying.
I would say that her wanting to include future deals as part of this agreement is a red flag. Each deal should stand on it's own merit. If doing business with her is profitable for you then you continue to do business, if it's not a good deal then you look elsewhere.
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