Tax records off by over 500 sq ft - Measure the house!

[Matt Bell]

Hello BP Community,

I wanted to share a recent experience I had which took the equity out of a deal in an unexpected way.  Our realtor's broker knew a family who was looking to unload a property that was in a trust as part of an estate.  The house needed a decent amount of work and the neighborhood was not as good as it once was.  We are remote investors so our realtor sent us pics and all the details including the size - 1,928 sq ft 3/2.  We confirmed the details using the county assessor's website.  We received comps from the realtor which showed that rehabbed rentals in that area appraise for $25-27/ft and should rent for $750 to $800/mo.  Based on this information we expected the house to appraise for $48-50K when all was said and done.

We generally try to use the BRRR strategy made famous by Mr. Brandon Turner on the podcasts. So, here are the numbers:

Purchase Price $22,500

Rehab Budget $13,500

Total Invested $36,000 (closing costs and things are including in our round numbers here).  

So, we finished the rehab, listed it for rent, and started the cash out refinance process.  We received an appraisal of $36,000 which shocked us and at first we could not figure out why it was so low - and then it hit us - the appraiser measured the house at 1,417 sq ft.  There is a screened in patio but it is not heated or cooled so we knew that did not count - but even if it was counted - it would not have added 500+ sq ft.  Long story short, the appraiser's measurements are accurate and the sq ft in the tax records has been wrong for 40+ years from what we can tell - with no obvious explanation as to why they were off by so much.  (NOTE: Taxes are so low in this market that no one really challenges tax values or sizes because you only save like $100 if you win the challenge).

So, now we have a nice rental that should still hit the 2% rule but we have no equity in the deal and thus cannot get our cash out of the deal - we can get 80% of it out at least.

LESSON LEARNED - Don't trust tax records and have your contractor measure the house to make sure you are at least in the right ball park.

I am creating a list of lessons learned in this business - we have only been in it for 6 months in earnest (closed 4 deals with 1 more set next week) but I never saw this one coming.

Any creative ideas on how to deal with such a situation? Has anyone else encountered an issue where the tax records show the house is 25% larger than it actually is?