Worried about equity and property value for turnkey purchase

[James Wierzba]

Hi,

I just made an offer on a turnkey rental property (duplex) in a rural town. It is recently renovated, and fully occupied. It will cash flow immediately. My offer is significantly less than the listing price. Read below for why. (I don't expect the offer to be accepted)

My concern:

There are not many comparable properties in the area. Given this, and the fact that I don't know the area that well, I cannot be confident in the value of the property.

I might make great cash flow for a few years. But, if I want to sell the property in 5 years and can't find a buyer, I may have to sell for $20K less than I bought it for. I may actually end up losing money!

How can I acquire confidence in the value of the property? Can I use my lenders appraisal as a source of truth? They would tend to be conservative on the estimate, I would imagine.

[Chris Clothier]

Originally posted by @James Wierzba:

Hi,

I just made an offer on a turnkey rental property (duplex) in a rural town. It is recently renovated, and fully occupied. It will cash flow immediately. My offer is significantly less than the listing price. Read below for why. (I don't expect the offer to be accepted)

My concern:

There are not many comparable properties in the area. Given this, and the fact that I don't know the area that well, I cannot be confident in the value of the property.

I might make great cash flow for a few years. But, if I want to sell the property in 5 years and can't find a buyer, I may have to sell for $20K less than I bought it for. I may actually end up losing money!

How can I acquire confidence in the value of the property? Can I use my lenders appraisal as a source of truth? They would tend to be conservative on the estimate, I would imagine.

First, when the lender orders an appraisal, it is an opinion.  The lender themselves use outside companies (in most instances) to rotate through appraisers randomly.  So, you would be getting an independent, random appraiser giving you there opinion.  The best way to get an accurate idea of what the value would be is to have three appraisals done.  You would then have three different opinions and can average those out to get an accurate idea of an independent value.  That would be costly, but if you are worried, that is one way to go.

The bigger issue is this.  

You ran numbers and you were satisfied with the calculations at the price you offered.  Why are you already thinking about selling?  If you are worried about exit strategies and the rural aspect of the investment raises your risk for resale, then calculate that into your price and buying decision.  It is a risk.  Your job is to determine if the risk is worth it.

If you are are just thinking out loud that you may want to sell in 5 years, given your own statements that it is making great cashflow for 5 years, then who cares?  While it cashflows you keep it.  Place is on the market for your price and if it sells, then it sells and if it doesn't then it cashflows.

I think you are very smart for asking questions and thinking about scenarios, but based on what you've listed, assuming you've done all your homework and they accept you offer, it sounds like a good deal and I would be less worried about a worst-case scenario.

Best of luck