How to Figure out Value of rehab-home before I purchase?

Question

Hello everyone,

Question: I recently closed on a property for 215k.  This is my first investment deal so I went in and dealt with a wholesaler (not sure if that was the best idea but here we are) and put down 5k (non-refundable) deposit into escrow.  I did walk the property before hand, figure out the rehab cost and looked at the potential ARV.  It all checked out with tight numbers but it was looking good. Lending was with a hard money lender I am using, 85/15.  Right before closing the appraisal came back with a value of 195k, 20k under the number I signed the contract for.  The wholesaler was not willing to negotiate the price and I was already in the hole 5k on the escrow deposit.  I scrambled to come up with the 20k difference to make the deal happen.  I did not want to lose the 5k deposit on my first deal and the ARV I got back from the appraisal was way higher than we anticipated, so I wanted this deal.

So my question is how do I avoid not knowing the as-is value of the property before I purchase to rehab?  Would it be smart to pay for my own appraisal before actually sign the contract.  Is there any books I could get recommended to help me better learn how to appraise a property myself? Just trying to avoid paying 20k over value price on a rehab property and not get stuck again.

any help would be appreciated, Thank you all!

David Ramirez · Answer

Hey Emilio,

I agree 100% with @Nathan G. Hard money lenders that I have worked with only send an appraisal to evaluate the after-repair value. If you think about it, it makes more sense than getting an as-is value because of the comps you can get. With that said, when buying a property from a wholesaler I would recommend always running your numbers twice and never going above your MAO because of fear of losing the property.

Feel free to DM in case you need anything else!

Regards,

David

Alex Talcott · Answer

You get to decide whether it's even a "How do I" question to any extent.

I don't like, and I don't think I'm good at, forecasting-calculating ARV.

I work with various partners who not only can do it, they can't help but underwrite deals and live in spreadsheets. It's their thing!

Emilio Pereira · Answer

ok thanks everyone!

I guess this lender sent out an appraiser to get the as-is value because they only lend 85% on the AS-IS value. So me knowing the estimated as-is value before I sign the contract is where I lacked at in this deal. I brought a legit GC for the rehab cost. Which again the ARV came in way over what we excepted which was the good news. Just had to bring out more out of pocket to make the deal happen because sale price was 20k over as is value of property. I will jsut have to keep doing deals and get better at finding out the estimated value of a as is property. Thank you!

Bruce Woodruff · Answer

You say you 'figured out the rehab cost'. Are you a seasoned General Contractor? IF not, this is where your potential issues could lie. Get a GC to do a budget for you that is accurate to the penny. The see if the deal still works.

An appraiser is not what you need right now, you need a Builder/Contractor to give you real numbers....

Scott E. · Answer

Knowing the as-is value of the property before you purchase to rehab is something that you will get better at with time. As you do more deals in that area, and as you do more deals with this lender, you will become more accurate with your estimates. The market conditions are shifting though, and we are bound to see that shift in appraisals over the next 6-12 months so keep that in mind as well.

Nathan Gesner · Answer

Appraisers aren't always accurate and sometimes they are wildly wrong. I bought my first investment in 2016 for $55,000. As a REALTOR, I knew the property would be worth $75,000 as is and $150,000 after repairs. The appraiser valued it at $65,000 which was about the value of the land it sat on. Two months later, he appraised a property for some of my buyers and used my investment as a comparable. It had only been two months and I hadn't made any improvements to my investment, but he changed the value to $90,000. One month later my insurance company appraised it at $155,000.

You can know the value by knowing the market. What something appraises for, and what it's worth to you, may be wildly different. The appraiser may not see the value the same way you do. They may suck at their job. Maybe they make an innocent mistake.

You need to know your numbers. That's what makes or breaks the deal.

How to Figure out Value of rehab-home before I purchase?

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