Advice Needed-Appraisal came back low on Duplex-Cover the Gap?

Question

Hello BP Community,

I` d appreciate some advice on a decision I am making about moving forward with a duplex I have under contract. I currently have three multifamily properties, ranging from 4 to 8 units. I'm doing well with all of them, and generating healthy cash flow. It's been 18 months since I made a purchase, and have been outbid on 7 units over that time. I've gotten more and more aggressive in my offers, ranging from cash only for smaller properties, large nonrefundable escrows, no inspections, etc.

I had an offer accepted on a newer, 3 year old duplex last month. The sellers agent said they were considering multiple offers the first day, many of them cash. I have seen cash offers here up to 1 million on the others I have lost. I made a bid 10k over asking, and the seller accepted my offer. The appraisal came back 60k less than my offer today.

If I proceed, my lender would expect me to cover the appraisal gap. I could come up with the cash to cover the gap, but I'm concerned, with how the market is potentially softening in our area, that I may be saddled with a property that will be difficult to sell in the next few years. I tend to be a buy and hold investor, but am open to other strategies.

I have another lot that I could potentially build a duplex on , in the same area, and come in with a new build right at the appraisal value-a $60k savings. But, with the delays in our area in construction, it'd likely be a year to 18 months at a minimum prior to completion. I have locked in a 4.25 rate now on the mortgage for this duplex.

Would you wait and build, save the 60k now, and likely be saddled with a higher interest rate for the new build? Or forge ahead, cover the appraisal gap, and have an up and running duplex now?

Thanks for your advice...

Bjorn Ahlblad · Answer

I would not vote for the build option. Too out of control with, shortages, price increases and manpower problems. Nor would I jump in on that 50k shortfall. I'm sure they are sweating with the market changes. But those are your decisions. All the best!

Luka Milicevic · Answer

@Lee GrahamI would first try and negotiate the price down. If they don't budget, then I would make up the difference. You are in the same position as so many buyers. Making tons of offers, finally getting one accepted....and then this happens. If you terminate the contract, you're going to most likely end up in the same situation once you get your next property under contract. I've had many appraisals this year come in low. Sometimes the sellers would budge, sometimes they wont....Everyone mentioning the market softening...Yes, it is softening but we are still in the hottest sellers market of all time. The market has softened from properties selling $100k over asking price in a day, to properties selling $80k over asking price in a day. Don't think that things have softened to a point where buyers have been put in the drivers seat. We are still in a red hot sellers market.

Russell Brazil · Answer

Switch lenders to get a new appraisal.

Lee Graham · Answer

Thank you all for you advice.Latest update; I negotiated the price down $50k($10k over appraisal). Looks like, if all goest well, we will close at that price. Ultimately, I feel good so far about the deal-getting it more in line with the appraisal gives me much more room for unplanned expenses.As this wave of price valuations goes up, and I'm raising rents to cover the increased taxes and insurance costs, the margins get so much tighter on a deal like this, that seeing the seller adjust as needed makes me feel much more ready to tackle the unforeseen. Termites are a regular occurrence here, and tenting can cost several thousand dollars-taking out a months worth of rent, or 4 months of profit on long term rentals-very quickly. I am having to do this at one of my other properties right now, and having bought it at such a low valuation years ago makes it a faint blip on the profit chart, instead of a massive red line...Onwards and Forward!

Austin Johnson · Answer

Man. you asked what would I do? if I had the $60k, if I challenged the appraisal. if I tried to lower it? if these were my only two options? if I ran the calculator and found out I'd cash flow even after the $60k? i'd spend the $60k and hold on. the market may or may not be softening. but if youre cash flowing, why not ride the waves?

Andrew Garcia · Answer

Hi @Lee Graham, how much did you put down on the property?If it was more than the minimum, there are options.

Lee Graham · Answer

Eric Starks InvestorOrlando, FL Replied 12 hours ago Check the sales price on the appraisal. As @Russell Brazil said, the appraisals normally come in around the sales price. I had a low appraisal with a contingency and was ready to back out when the seller noticed that the appraiser used the wrong sales price. Once they change the sales price to the correct number and redid the appraisal, low and behold, the property appraised for $5K over the sales price. You can always challenge the appraisal if you can find better comps as well.Unfortunately, the numbers are correct. The last unit sold that was similar to the one I`m under contract for was sold 6 months ago, and it had been under a new build contract for a year, so the price was artificially low. That, ultimately, is the issue; as they look at comparable sales, they are looking at dated data, because there is very little being sold as a new duplex in this area-it is a historic area with mostly 100 year old homes. The single family home three houses down, that was the same size as one of the units in the duplex I am under contract for, sold for less than half of what I am under contract for for the duplex last month. It was 100 years old, and would require 75k worth of work to make it rentable. The one I am under contract for is 3 years old.If I had something that was a black and white comparison that I could show an appraiser, I would be apt to get another appraiser, try to convince the seller to wait, and go through the waiting game with another lender. But this seller is trying to close fast, and apparently I am up against cash offers.I`m working on getting the price down. But ultimately, I anticipate the seller deferring to a cash offer if I do not cover the gap...Thank you all for your advice.

Eric Starks · Answer

Check the sales price on the appraisal. As @Russell Brazil said, the appraisals normally come in around the sales price. I had a low appraisal with a contingency and was ready to back out when the seller noticed that the appraiser used the wrong sales price. Once they change the sales price to the correct number and redid the appraisal, low and behold, the property appraised for $5K over the sales price. You can always challenge the appraisal if you can find better comps as well.

Russell Brazil · Answer

I do.98% of appraisals come in at or above contract price. The statistics are in your favor to get a new appraisal. Who cares if you spent $700. We are talking about potentially saving $60k.

Lee Graham · Answer

Russell BrazilPREMIUM Real Estate AgentWashington, D.C. MODERATORReplied 11 minutes ago Switch lenders to get a new appraisal.Thanks for that advice Russell; since I'm already at close to 30 days in, and paid $700 for this appraisal, that at least seems logical and pragmatic, I doubt another appraisal would come in much higher, unless another similar property close by was already under contract that I could show the appraiser. Going back to the seller, getting them to extend the contract, paying another $700, without a reasonable chance of raising the number, seems like throwing good money down the drain...I have closed three deals with my lender, and the appraisals have always been fair and the deals have worked well. We have a good relationship. I originally compared other lenders to them, but they always were at least .10 percent lower, and are a local bank that I feel good supporting.Do you disagree?