Would you pay above appraised value?

[Chris Dee]

Hi Everyone, 

I'm under contract for a multifamily property for $300k.  Bank appraisal came in at $282k.  Appraisal came in low because there are few multifamily comps and they all sell at massive discount because they were never updated and need total overhauls. Seller paid for 2nd appraisal, came in at $305k, but had lots of poor appraisal practices in it and cannot be taken seriously.  I can make the property cashflow nicely and to me the value is there at the current market price. It seems that paying above appraisal is considered poor practice. Does anyone have a story where it worked out for them? My deal details below.

Location: Midwest, mid-size town with a number big and small companies, hospital, heavy summer tourism. I'm extremely familiar with this area.

Property: 3 unit, all 2 bed/1bath (1 of the 3 units is not allowed as rental due to zoning. It is half below grade and very well finished with 3 egress windows. )

Cost: $300k (contract) (Appraisal by the bank:$282K)

Rent: Long-term rental: If I only rent 2 legal units min rent is $3200, if I rent all 3 units min rent is, $4K. Midterm rental possible because of traveling professionals and hospital. Short-term not allowed by city.

Condition: Built in 1930, All units are updated, newer roof, new windows, new foundations, new sewer, new electric/plumbing. I should expect minimal maintenance.

Renter Class: B

Thank you for your thoughts!

[Chris Seveney]

Quote from @Chris Dee:

Hi Everyone, 

I'm under contract for a multifamily property for $300k.  Bank appraisal came in at $282k.  Appraisal came in low because there are few multifamily comps and they all sell at massive discount because they were never updated and need total overhauls. Seller paid for 2nd appraisal, came in at $305k, but had lots of poor appraisal practices in it and cannot be taken seriously.  I can make the property cashflow nicely and to me the value is there at the current market price. It seems that paying above appraisal is considered poor practice. Does anyone have a story where it worked out for them? My deal details below.

Location: Midwest, mid-size town with a number big and small companies, hospital, heavy summer tourism. I'm extremely familiar with this area.

Property: 3 unit, all 2 bed/1bath (1 of the 3 units is not allowed as rental due to zoning. It is half below grade and very well finished with 3 egress windows. )

Cost: $300k (contract) (Appraisal by the bank:$282K)

Rent: Long-term rental: If I only rent 2 legal units min rent is $3200, if I rent all 3 units min rent is, $4K. Midterm rental possible because of traveling professionals and hospital. Short-term not allowed by city.

Condition: Built in 1930, All units are updated, newer roof, new windows, new foundations, new sewer, new electric/plumbing. I should expect minimal maintenance.

Renter Class: B

Thank you for your thoughts!

I would not pay above appraised value for an investment property unless I knew it had some competitive edge that would increase its value considerably (ie. it was a subdividable lot or allowed for other uses that enhanced value that were taken into consideration). Just my opinion as if I needed to sell, then you are limited because most likely you are underwater. 

[Russell Brazil]

If someone were paying cash, there wouldn't even be an appraisal. 

[Russell Brazil]

If someone were paying cash, there wouldn't even be an appraisal. 

[Chris Dee]

@Chris Seveney 

Thank you, Chris, yes I agree with you. There is a secondary staircase that can be removed in the property to add 1 bedroom to each of 2 units. So, there is that. Personally, I think the true appraisal is somewhere around $290k before addition of those bedrooms. 

[Bjorn Ahlblad]

A while back I was selling a house and we needed an appraisal. Guy came in, walked around and took notes. Then he came over to me asked if I was the owner and said  "nice house, you looking for a high number or a low one"? He continued......."if it is a divorce and you are buying her out you want a low number and if it is for a sale you want a high number"............No kidding! Appraisal indeed.

[Chris Dee]

Quote from @Bjorn Ahlblad:

A while back I was selling a house and we needed an appraisal. Guy came in, walked around and took notes. Then he came over to me asked if I was the owner and said  "nice house, you looking for a high number or a low one"? He continued......."if it is a divorce and you are buying her out you want a low number and if it is for a sale you want a high number"............No kidding! Appraisal indeed.

 Yikes, that's what happened in the 2nd appraisal for this house. In order to get into the number that seller wanted the appraiser used the following values: a bedroom = $10k, 1 br apartment = $5k, 2 bedroom apartment (above grade) = $15k, bellow grade 2 br apartment with no kitchen = $25k.  He basically made up numbers based on what he needed. The seller said "Ok, we have our real number, we aren't budging."  Even if I go to fight with the ridiculous report they still have it in their head it's worth $305k.  So, what do I do?

[Chris Dee]

Quote from @Russell Brazil:

If someone were paying cash, there wouldn't even be an appraisal. 

 There are some cash buyers in my area, but they go for the ultra discounted properties only. 

[Daniel Brown]

Appraisals are pretty useless in my opinion. Most of the time they look at the sale price on the contract and yup its worth that. I would base my decision to buy more on my investing goals, am I buying for cash flow, appreciation, or tax savings. If those reasons make sense I buy. 

[Ryan Porter]

If they appreciate at all, that would make me feel better about the deal. I could see myself paying the above appraisal for a multi-unit quicker than I would an SFR, just because I know I could pay the note with it not being 100% capacity. I like to have two escapes on a property if things go south. One is renting it. That is the goal, of course. Two is selling it. I wouldn't count on being able to sell it for above appraisal. In this case, however, you have option two: lower the rent or have one or two renters who will help with your payment until it's fully rented. I would still want to sell as an option in a year or so. Even if you plan to keep them long-term, having that option is key. So, if they appreciate it at all, I would feel good about it.

Congrats! 

[Chris Dee]

Quote from @Daniel Brown:

Appraisals are pretty useless in my opinion. Most of the time they look at the sale price on the contract and yup its worth that. I would base my decision to buy more on my investing goals, am I buying for cash flow, appreciation, or tax savings. If those reasons make sense I buy. 

 Thank you Daniel. Yeah I would say both appraisals were off.  I can make this property work nicely for what we need. But I'm hating the feeling of paying the seller more than they deserve for the property.

[Chris Dee]

Quote from @Ryan Porter:

If they appreciate at all, that would make me feel better about the deal. I could see myself paying the above appraisal for a multi-unit quicker than I would an SFR, just because I know I could pay the note with it not being 100% capacity. I like to have two escapes on a property if things go south. One is renting it. That is the goal, of course. Two is selling it. I wouldn't count on being able to sell it for above appraisal. In this case, however, you have option two: lower the rent or have one or two renters who will help with your payment until it's fully rented. I would still want to sell as an option in a year or so. Even if you plan to keep them long-term, having that option is key. So, if they appreciate it at all, I would feel good about it.

Congrats! 

So, I don't think anything will be appreciating in the next 5 years (my personal view of the economy). However, long term I am very positive on this city and the state in general. We want to hold long term so we feel pretty confident about the purchase. It's easy to find renters here and we can pay PITI with just 2 units rented. So, if we end up renting the 3rd it will be all cashflow. If we end up refinancing that will all be cashflow too. Thank you for your response and encouragement!

[Jay Thomas]

The appraisal for your $300,000 house came in at $282k, which is a typical problem. This implies that you would have to have the $18,000 in cash. The low appraisal may have been impacted by the small number of similar properties and the outdated comps. While getting a second opinion could be an option, watch out for warning signs. If you negotiate a lower purchase price or have faith in the property's long-term value, spending more than the appraisal may still be feasible given the property's high cash flow potential and your experience with the market. Even with the possible down payment gap, it's imperative to thoroughly review the figures to make sure the investment is still financially healthy.

[Mike K.]

Quote from @Chris Dee:

Hi Everyone, 

I'm under contract for a multifamily property for $300k.  Bank appraisal came in at $282k.  Appraisal came in low because there are few multifamily comps and they all sell at massive discount because they were never updated and need total overhauls. Seller paid for 2nd appraisal, came in at $305k, but had lots of poor appraisal practices in it and cannot be taken seriously.  I can make the property cashflow nicely and to me the value is there at the current market price. It seems that paying above appraisal is considered poor practice. Does anyone have a story where it worked out for them? My deal details below.

Location: Midwest, mid-size town with a number big and small companies, hospital, heavy summer tourism. I'm extremely familiar with this area.

Property: 3 unit, all 2 bed/1bath (1 of the 3 units is not allowed as rental due to zoning. It is half below grade and very well finished with 3 egress windows. )

Cost: $300k (contract) (Appraisal by the bank:$282K)

Rent: Long-term rental: If I only rent 2 legal units min rent is $3200, if I rent all 3 units min rent is, $4K. Midterm rental possible because of traveling professionals and hospital. Short-term not allowed by city.

Condition: Built in 1930, All units are updated, newer roof, new windows, new foundations, new sewer, new electric/plumbing. I should expect minimal maintenance.

Renter Class: B

Thank you for your thoughts!

 Chris, I've been an appraiser for 30 years and I review other appraisers work for a living.  The important thing to remember is an appraisal is just an opinion of value. Some of the opinions are well supported and credible and some are not.  Seems like you are knowledgeable of the market and confident in your investment analysis.  I would use the low appraisal as a negotiating opportunity and try to get them down on the price a little, then close the deal. 

[Chris Dee]

Quote from @Jay Thomas:

The appraisal for your $300,000 house came in at $282k, which is a typical problem. This implies that you would have to have the $18,000 in cash. The low appraisal may have been impacted by the small number of similar properties and the outdated comps. While getting a second opinion could be an option, watch out for warning signs. If you negotiate a lower purchase price or have faith in the property's long-term value, spending more than the appraisal may still be feasible given the property's high cash flow potential and your experience with the market. Even with the possible down payment gap, it's imperative to thoroughly review the figures to make sure the investment is still financially healthy.

 Thank you, Jay, your advice reads like a textbook, well said! I agree with you completely, but it feels like jumping off a cliff when paying above appraisal. 

[Matthew Paul]

Now back up 7 years , if you bought the same property 18K under apprasial where would you be right now ?   In my area , inventory is still low and people are offering over asking , without an apprasial contingency .

If you are happy with the deal and you can make the numbers work , go for it . 

[James Mc Ree]

Value is what you calculate the property is worth. The seller has an opinion and so do appraisers, but no other skin in the game. Try to leverage the low appraisals to lower the price, but go with a good deal if you have one. There isn't that big of a difference in the amounts, especially if you are planning it to be a buy and hold.

Think of it another way: how much are you willing to lose the property for? If another bidder offered the seller their price (or any price) and the seller accepts, do you feel like you lost a great deal?

[Chris Dee]

Quote from @James Mc Ree:

Value is what you calculate the property is worth. The seller has an opinion and so do appraisers, but no other skin in the game. Try to leverage the low appraisals to lower the price, but go with a good deal if you have one. There isn't that big of a difference in the amounts, especially if you are planning it to be a buy and hold.

Think of it another way: how much are you willing to lose the property for? If another bidder offered the seller their price (or any price) and the seller accepts, do you feel like you lost a great deal?

 Thank you James, yes, there were times I considered walking away and was sad about it, lol. So my gut feeling told me I wanted this property. I just had a hard time getting around the appraisers blow. :( The 2nd appraiser didn't make me feel better because his math was awful and it looked like he had to work really hard to jack up the price. But my thought is: I can cashflow really well now and it will only improve through the years.

[Chris Dee]

Quote from @Matthew Paul:

Now back up 7 years , if you bought the same property 18K under apprasial where would you be right now ?   In my area , inventory is still low and people are offering over asking , without an apprasial contingency .

If you are happy with the deal and you can make the numbers work , go for it . 

I hear you, but 7 years ago we were on the way up (even if we didn't think so). Now, the FED is definitely determined to slow us down. So, I hope we will see increase within the next 10 years. In my area its really hard to get multifamily properties and SFH don't cashflow well anymore with the current interest rates. If we don't get any maintenance surprises with this house, the deal should be good.

[Nathan M kiefer]

I've done this before and this is how i did it. I knew the property was going to perform well- all the boxes were checked. I also paid cash and we were apart 50k from what the appraiser showed and what the owner wanted. 

this was an off Market deal, I negotiated a 3 year 4% loan with the seller and. Closed the deal.

if you are smart you will still do the diligence if your paying cash including an appraisal. I have 375k into the deal, rented the property for two years at a 140kgross and will pay the owner off that note in about 11 mos. 

the property is now around 650-700k. 

depends on your situation but for the nominal difference your talking I say go for it but if you're leveraging the upfront you need to cash in the overage for the appraisal and vice versa if your cash up front then have the seller carry a note 

from my experience- it also shows that the seller believes in the project by doing so 

if they won't carry a note separately id potentially walk but thats because we do mostly cash deals and the inability of them to believe in what I am willing turn me off to the deal when your talking about this gap

[Stephen Montez]

Appraisals are an art, not a science! You can always ask for a home to be reappraised if a valuation comes in low and not only that, you can provide evidence to why you think the appraisal is wrong and where you think it should be. All that to say, if you have sufficient evidence that the market is showing the value of the home is different than what the appraisal comes to, then appraisals should not be an issue. Hope that helps!