Appraisal came below Purchase Price - What Should I do?

Real Estate Deal Analysis & Advice
9yFollow

Appraisal came below Purchase Price - What Should I do?

Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

Hello Everyone,

I hope this is the correct forum for me to submit this. My apologies if it is not.

I put in an offer in a row-home in Allentown, PA.
Seller's original asking price was $50,000 and we agreed to $47,000 with a closing date of 7/14/17.


The Home appraisal from the bank just came in and the home appraised for a measly $36,000...
The bank will only finance 80% of the 36,000. So I need to either ask the seller to decrease the selling price or bite the bullet and pay 20% of 36,000 and the difference of $47,000 and 36,000 plus closing costs.

Below is the Rental Cash Flow Analysis

Rent = $900
Property Management = -$90
RE Taxes/Trash = -$100
Water = -$50(I am inheriting tenant and lease says landlord pays)
Repair Reserve = -$45
Cap Ex Reserve = -$90
Vacancy Reserve = -$45
Interest = -$125
Insurance = -$40
Principal = -$150


Monthly Cash Income $165

More details on the property is that it is built in the early 1900's and is 900 SQ.


Question for you guys is what do you guys do when the appraisal goes below the contract price?
Do you try to negotiate for the appraised value? Do you wiggle from there or stick to the appraised value.


Thank you in advance to anyone who provides me feedback.

Basit

[email protected]917-280-8544
Basit Siddiqi CPA4.979 Reviews
View Page
1Reply
25 views

Most Popular Reply

Ben Wilkins
Rental Property Investor · York, PA · Member since 2017 · 377 posts · 315 votes
9y

@Basit Siddiqi - always good to see another Pennsylvanian in the forums!

Doing a quick estimate in my head, that looks like a 15 year COC ROI if you pay the difference, which isn't phenomenal. What attracted you to the property to begin with?

How motivated is the seller? Regardless of what you do, I would attempt to talk the seller down simply based on the appraisal. (There's your quick answer to the question haha)

Was it a drive-by appraisal, or a full appraisal?

Kudos on putting aside CapEx, maintenance, PM, etc.

1Reply
See this reply in the discussion

24 Replies

Jump to latestLatest
  • Ben Wilkins
    Rental Property Investor · York, PA · Member since 2017 · 377 posts · 315 votes
    9y

    @Basit Siddiqi - always good to see another Pennsylvanian in the forums!

    Doing a quick estimate in my head, that looks like a 15 year COC ROI if you pay the difference, which isn't phenomenal. What attracted you to the property to begin with?

    How motivated is the seller? Regardless of what you do, I would attempt to talk the seller down simply based on the appraisal. (There's your quick answer to the question haha)

    Was it a drive-by appraisal, or a full appraisal?

    Kudos on putting aside CapEx, maintenance, PM, etc.

    1Reply
  • Basit SiddiqiBusiness Member
    OP
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9y

    @Ben Wilkins - Hi Ben!

    Thank you for taking the time to read my post and provide me feedback.
    I was hoping the 15% COC ROI is a very conservative amount and it really comes out to 20%-25% at the end of the year.

    I was attracted to the property because it looks like a carpet/paint kind of fixup(if any). Outside looks good, Inside looks good. Home inspection came back and the only major deficiency was fixing some windows.
    I liked the tenants.
    I liked the COC analysis that I did.


    I just did a biggerpocket search to see the difference of a drive-by-appraisal or a full appraisal.
    I think it was a drive-by-appraisal. Only reason I saw this is because the lender never reached out to request getting into the home. I doubt he communicated with the seller. I will read the appraisal report later today to confirm.

    Can I also ask. I paid $675 for my appraisal(big bank - Wells Fargo). What is the going rate for a home appraisal? what is the cost difference between a drive-by-appraisal and a full appraisal?

    What is a good way to tell how motivated the seller is?

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Ben Wilkins
    Rental Property Investor · York, PA · Member since 2017 · 377 posts · 315 votes
    9y

    @Basit Siddiqi - the bank usually charges the same for the appraisal either way, but doesn't tell you which one that they are doing. You might be able to dispute the appraisal value if you think that the house would get a higher number from a full appraisal. Unfortunately, banks use drive-by's to complete their "due diligence" without putting in enough time.

    $675 is high for my area - it's usually closer to $300 for what I'm charged.

    You can tell how motivated the seller is by either straight-up asking why they are selling, or by taking the appraisal to him and saying that you cannot buy the house unless if he meets you in the middle and reduces the price.

    As to why you were attracted to the property: those are good reasons - cash flow, easy tenants, basically turn-key, not a lot of work.

    Ask the seller to meet you in the middle and offer him $41k, and ask the seller to cover closing costs to offset the difference. If he bites, he's motivated and you probably should have offered lower ;)

    If he nibbles, stay at $41k and pay the closing costs yourself

    Since you were willing to pay $47k, I'll guess that the deal is worth $41k for you as well if you have the cash to offset the appraisal difference.

    Another option is to get a second appraisal, and ask to be there when it happens.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Go back to the seller with the appraised price, 36K take it or leave it.

    1Reply
  • Matt A.
    Investor · St Augustine, FL · Member since 2016 · 135 posts · 126 votes
    9y

    I ALWAYS put an appraisal contingency in my offers. Depending on what your offer looked like you may/may not be able to bail and get your earnest money back. That said, the appraisal will "stick" with the property for 6 months or so, meaning that nobody else will get anything other than a$36k appraisal - so the seller has some incentive to renegotiate depending on his urgency to sell.

    I had a similar thing happen about a  year ago - ask was $175k (or so), offer accepted at $163 WITH APPRAISAL CONTINGENCY), appraisal came in at $145 and I agreed to add another $5k to the deal (the agents also sweetened it up to the seller by cutting their commissions as well). I waited till 48 hours before closing to spring the news and was ready to walk, in fact I had already sent the contract termination over and they knew I was seriously going to "leave it". In the end I got the property (although the agent was so pissed that he wont work with me anymore as he didnt earn his full commission - that's another story), but I do have a property that cash-flows almost $20k annually now!

    Im not sure how Wells will react to a second appraisal, you could ask that it be reviewed.... that's typically an uphill battle. Personally Id adopt a "take it or leave it" stance. Heck, the $50k properties in Allentown are in borderline war zones anyways.... for me those are NOT the tenants that I want (getting paid is a major hassle). At two grand cash per year your going to be negating with a single months vacancy plus re-rent costs. I think youll also find your maintenance/repair fund falls short, I own some 1900's properties and crap is always needing fixed, but thats just my opinion. Personally the deal is way too skinny for me. Good luck.

    0Reply
  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
    9y

    @Basit Siddiqi

    If you are still interested in this property let the seller see the appraisal and ask will he sell home for that price.  If not then it will be best for you to walk away.

    0Reply
  • Basit SiddiqiBusiness Member
    OP
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9y

    @Matt A. - I put a financing contingency in the contract. I was thinking there was a good chance that I would get my earnest money back since the bank won't finance the project currently. However, I plan to add an appraisal contingency going forward...
    at first I was thinking I lost only the home appraisal fee and home inspection fee...now I have to worry about the earnest deposit...sigh...

    It would be really beneficial/informative for me if you can tell me about your investments in Allentown. Maybe we can have lunch sometime in Allentown, my treat!

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Basit SiddiqiBusiness Member
    OP
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9y

    @Michael Totman - Thank you for the offer; However, I am looking for hands on experience right now and not looking for partnership opportunities. 


    I am going back to the seller and asking for $36,000 and likely wont budge too much from there(37,000 max).


    Matt's description of the area is accurate. However, I am noticing improvements in the area over the years. There also appears to be a lot of support from the state(tax levied in the city going back into the city instead of to the state).

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Joe Colasuonno
    Rental Property Investor · Allentown, PA · Member since 2012 · 92 posts · 80 votes
    9y

    Big Allentown investor here. What is the address of the property? Is it an alleyway rental? Condition? How long has tenant been in place?  You need to budget about 10% for vacancy and $1000 a year for repairs and maint for these older row homes. 

    0Reply
  • Basit SiddiqiBusiness Member
    OP
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9y

    @Joe Colasuonno - Hi Steve, The address is 333.5 N Lumber Street, Allentown, PA 18102.


    What do you think?

    I just reached out to the seller for 36K and he said "He is not agreeing to $36K at this time" 

    I was kinda looking for ways to make this work...but I think I am getting a lot of support from the BP members saying to back out...

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Joe Colasuonno
    Rental Property Investor · Allentown, PA · Member since 2012 · 92 posts · 80 votes
    9y

    Seller wont drop price on that most likely because he owes too much. Bought it for 49k. If you want a decent rental that will appraise well you need to look off of alley properties. I know some off market homes in that price range that will appraise well if youre interested.

    0Reply
  • Basit SiddiqiBusiness Member
    OP
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9y

    @Joe Colasuonno - Sorry I forgot to answer the remaining questions.

    It is in an alleyway street.
    condition is okay. Home inspection only mentions replacing windows as a major deficiency.
    Tenant has been in place for 8 months.
    Tenant has 2 kids between the age of 10-15 so i figured them to be nice and hopefully paying tenants who stay in the long-term.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Chris K.
    Attorney · Nashville, TN · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    @Basit Siddiqi

    What kind of Agreement of Sale did you use? If it is the Standard Agreement of Sale prepared by the Pennsylvania Association of Realtors, see what it says in Section 8. Depending on what it says, you might be able to get out of it if you wish. 

    Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    9y

    You can look into comps if you have better comps you can challenge the appraisal.  Negotiate the price.

    0Reply
  • Justin B.
    Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
    9y

    The short answer is: Adjust your offer to the appraisal price.

    The long answer is (And I have done this once before):  The appraisal price is a significant % below the offer.  Unless there are some extraordinary expenses on this one, a house for $47k that rents for $900/month is a really good deal.  If you can find good comps and go to the bank and say the appraiser just did a bad job, they may do an in-house evaluation.  You can show them the numbers and show that the property works well and they may do it.  I tried once and was successful.  My example was a house for $79k that appraised for $60k.  The appraiser was an idiot and the bank did an evaluation and came back with $81k and had no problem lending on the $79k.

    The caveat here is it wasn't my first property and I had done several with the bank before and we had a perfect history of payment and showing good returns.  If it's your first property, I think the odds are against you but if not, it's worth a shot.

    1Reply
  • Vincent V.
    Real Estate Investor · Austin, TX · Member since 2015 · 65 posts · 50 votes
    9y

    In my opinion, you should be able to get out of the contract using Finance Contingency and get your earnest money back since you're not able to obtain finance at the purchase price.

    0Reply
  • Sam C.
    Lehigh Valley, PA · Member since 2016 · 144 posts · 91 votes
    9y

    Is this a 1 bedroom house? 900 sf feet is more like a decent sized apartment. I can get 15-2K sf houses in Allentown in alleys for 750-1000 per month. You will have a lot of turnover. Find out how many tenants in the last 5 years. The appraisal is what it is and the seller will most likely be stuck with it. You can a[peal the appraisal but in my opinion the house is probably not worth more than 30-35K at best. So 36K is actually a good number. If your purchase is contingent on financing, then you can walk away. If not, then take the hit on the earnest money and walk away. If they bought for higher than that, best that they keep it and pay down the principle. IF THEY HAVE TO SELL then they will have to deal with the appraisal. You could try seller financing  if you really want  a 900sf house in a row in downtown Allentown. 5K down, 20 yr amort with  a five year balloon. Give them a 4-5% interest rate and they'll can get closer to the 47k price off the interest made and you get time to work the property and get financing at the end of the balloon. 

    FYI, i have a 4 BR newly rehabbed row (near Sacred Heart Hospital) coming to market in about 2/3 weeks. Asking price will be 49,000. Move in ready and fully rehabbed. If you want more information, message me. 

    1Reply
  • Joe Colasuonno
    Rental Property Investor · Allentown, PA · Member since 2012 · 92 posts · 80 votes
    9y
    Sam Campano I may be interested in that. Have Phil give me a call about it.
    0Reply
  • Basit SiddiqiBusiness Member
    OP
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    9y

    Update

    The seller rejected my offer of $36,000.
    The seller/selling agent provided me a list of comps that they thought were more accurate.(I didnt think they were that accurate since they were for 1000 or 1100 square foot houses.)

    I gave these listings to my lender/appraiser and they said they would look into updating the appraisal. They mentioned that appraisals are revised less than 10% of the time.
    They will let me know on Tuesday if the appraisal is revised.

    I just wanted to thank the bigger pockets community for helping me understand things.
    I think if I didn't have you guys as support I would have done anything to get the deal to go through. But now I am thinking with a clear head. its only worth 36K...why pay more for it.

    @Sam C.- Hi Sam, the house has 3 bedrooms(small rooms).
    The Seller has a mortgage on the property with 39K remaining.
    I just reached out to my agent to ask him if he can do seller financing. I like that suggestion. Maybe I can offer him 38K if he can do seller financing.

    I reached out to you to connect and talk about the house you are putting in the market soon.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Sam C.
    Lehigh Valley, PA · Member since 2016 · 144 posts · 91 votes
    9y

    @Joe C I will do that

    0Reply
  • Sam C.
    Lehigh Valley, PA · Member since 2016 · 144 posts · 91 votes
    9y

    @Basit Siddiqi Good luck and I'll get you info on the house I spoke of. 

    0Reply
  • Eric E.
    Residential Investor · Allentown, PA · Member since 2012 · 95 posts · 29 votes
    9y

    Is it in Center City?  Then 47 k is WAY too much to pay for a 2 or even a 3 bedroom in an alleyway.   Alleyway houses always sell for much less cause that's where most of the shootings are.   

    0Reply
  • Matt A.
    Investor · St Augustine, FL · Member since 2016 · 135 posts · 126 votes
    9y

    @Basit Siddiqi, havent been on the site for a few days (been out making offers and that four letter word... "work" keeps getting in the way).

    Careful on the way the sellers interpret a finance contingency - they just might finance your deal albeit NOT at the amount of the agreed price, hence why I use an appraisal contingency. In my example I was all set and the lender had provided an approval letter.... if the appraisal comes in low they typically will still do the deal, just at 75% / 80% (or whatever terms your getting) of APPRAISED value or sales price - typically the LOWER of the two... so in essence that escape clause is now off the table. You simply have to come up with the difference in cash.

    Next time your in town look me up - Gladly meet you for a coffee or something.

    Cheers

    Matt

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free