Low appraisal vs NOI

[Oren K.]

So what do you do when the appraisal does not come close to value? Am I becoming yet another unrealistic owner :).

I have a 39 unit property that I have remodeled and re-rented. It has pros and cons;

Pros 

- Occupancy is now over 90% (needs a bit of seasoning but I am confident)

- NOI annualized is ~$120K (if not more)

- Just finishing extensive rehab 

Roof, heating (boiler and in-unit), kitchens cabinets and counter tops, updated appliances, bathrooms vanities / low flush toilets, all water valves, video system, unit painting and carpet, etc. Still a bit left to do (e.g. common area carpet & paint) and some tuck pointing but all the big stuff is done. A few occupied non-remodeled units left which have tenants from before purchase (leaving a bit of upside on the table).

- All tenants screened and management in place.

Cons

- ~60% section 8

- East Cleveland market

My problem is that having spoken to a couple of appraisers and lenders in the area, they have told me that no MF in East Cleveland appraises at more then 10K per unit due to the cities financial situation and general city issues. Also, literally everything sold in the past 2 years has been run down properties at fire sale prices that have undergone / undergoing some level of rehab but have not re-traded to reset the market.

On a NOI basis, using 8 - 12 CAP, you get $1MM to $1.5MM but the appraisal will likely only come in at ~$400M. A 65% LTV based on that appraisal will only be ~$260M; little more then 2 years of NOI.

My inclination is to either sit on it and just take the cash flow or see if it can be sold at a real 10 CAP ($1.2MM).

Any thoughts??

[Federico Gutierrez]

You can only hold it. Really only dummy would buy at 1million in East Cleveland. not the news you want but Sorry to tell you. You bought into an area where the market is not moving probably even going backwards.

The fact your making money you can take that as a win and hopefully those tenants remain good tenants.