What is the $$ Value of a Lead Free Rental?

Question

Hi BP community! My partner and I just had a deal on a Baltimore (21213) row home fall through on appraised value.

Here's the quick and dirty:

We agreed on a $74K sales price for a recently rehabbed lead-free unit. (I'm the buyer.)

The contract had an appraised value clause of $68K or higher.

Appraisal came in at $60K.

Even though our CoC return would still be somewhere around 15%, that left us with no exit strategy for the next 5 years and we walked from the deal.

My question is... the properties they used to comp were not lead free. Is there any "monetary value" to a lead free rental or no? Lead remediation is SO expensive (and ultimately valuable to a landlord) that I would think that would think it would bump up the appraised value.

My lender says no, but I wanted to hear if you guys have any interesting opinions on the subject.

Thank you!

Russell Brazil · Answer

@Sebastian Taylor sure.  So one of the most important jobs of an agent is to both make sure the property appraises, and make sure you are pricing it at a price that will appraise.  Some of us actually take classes on the subject. First you have to understand how appraisers come up with the price of a property, which can be different than what the market dictates the price as. There are condition adjustments, quality of construction adjustments,adjustments for certain features like extra bathrooms, or garages, or location, adjustments for a rising or falling market.  As an agent you need to know the comps, and how these compare against your property, so when you are talking with the appraiser you can talk about the value of these adjustments and how they pertain to your property. For example, my property is at $405k, and the comp is at $400k, but we have an extra bathroom and that should be valued at $5k, or vice versa.  Youve also got to be able to communicate well enough with the appraiser so that they are on your side, so you have to be good at building rapport.

Another aspect is knowing who the appraisers are. You do enough business and you are going to start running into the same appraisers over and over. This can be vital as you learn what appraisers are easy to work with (which is most of them) and which appraisers are difficult to work with. If you get one who you know is difficult, then you need to nip that in the but early and get that appraisal reassigned to another appraiser.

But thats just a few quick thoughts. I could write a whole chapter in a book about working with appraisers. Every agent is going to work with them a little bit differently, and how they do is often one of their pieces of proprietary business information. I always tell me sellers that I have to sell their house twice, once to a buyer and once to an appraiser.

Ned Carey · Answer

Yes @Julie Hassett it is a crooked system is some regards. If fact @Russell Brazil himself mentions one. There are incentives for all parties involved to distort the appraisal. Capitalism and a free market is the best economic system, but this is one of those cases where capitalism becomes distorted.  There are regulations that sometimes keep the most qualified appraisers from appraising a property. Isn't it amazing how an appraisal often matches the sale price exactly? Isn't it just as amazing an appraisal never comes in above the sale price.

Back to the original question. No lead free does not affect market value but does as @Gabriel G.affect the intrinsic value to an investor..  If a property is fully rehabbed it is essentially in a condition as good as or better than a property build in 1978. That is when lead paint stopped being used. So if it is a very complete rehab it will be comped to properties in virtually new condition. In other words all the appropriate comps would also be lead free.

That appraiser may have saved you from buying a property that was well upside down in value. There are many parts of 21213 that no property in any condition would be worth $76K because of the location.

Gabriel G. · Answer

Hey Julie, your lender is right. It would be really hard to determine the value of lead free vice not. On some houses only a door or trim might test positive for lead but another exact same style house might have lead everywhere. So typically there is no value for lead free on a appraisal. Doesn't mean there isn't a intrinsic value for investors (I'm willing to pay a little more if a house is lead free).

Hope that helped!

Ned Carey · Answer

@Julie Hassett I have a rental about 2 blocks from there. We figure that anything west of Brehms lane (closer to Belair Rd.) is not as good as the other side. But the rental I just mentioned is in that triangle and we are happy with it. We are into it for $55K and have a 12% loan for $45. The closer you are to the corner of Shannon and Sinclair the better.

Belair Edison had fallen in values a few years ago but seems to be coming back there are a number of comps solidly over $100K, However they are probably higher end rehabs than on the prperty you were looking at.

What you are trying to do Buy, rehab, rent, refinance and repeat (Brrrr) is not easy as some people make it out to be. It does become easier with time. However doing that and getting all you money back out of every deal is NOT the typical scenario. It can be done by smart creative investors, like you, but don't expect it to be easy. It certainly doesn't happen by doing average deals. It works best when you do great deals.  Don't worry, I think you are on the right track.

Sebastian Taylor · Answer

Belair-Edison rowhouse? You can rehab it for 30K total, what are you talking about? What exactly requires extra 30K lead-related?

It works this way: You hire a company who shows you what parts have lead paint. You remove all removable, and cover all non-removable. In most cases, all trim should be removed, and cornice and exposed brick inside and outside covered. I don't understand where 30k comes from, trim is most likely to be removed anyway because it is rotten.

And yes, you have to go lead-free, because of liability. It is much cheaper to eliminate lead paint than hire a lawyer, in my opinion.

Russell Brazil · Answer

It's not crooked at all, it's just a misunderstanding by people as to what an appraisal is for. An appraisal is not to determine a price of a home for independent reasons, that's what the market does. An appraisal is done to protect the lenders interest in a property.

In regards to the appraiser working with an agent over a homeowner, you are basically looking at several different reasons. First if they make an enemy of that agent, the agent won't let that appraiser into their properties in the future. So that is going to hurt his business. When working with an agent we speak their language and are doing a lot of the work for them in getting the comps and justifying the price...so if they can do their job quicker, they can make more money since they can pound out more reports.

But the most important reason is that on anew open market sale, the market has determined what the property is worth, so there is a built in risk control by an open and free market. On a refinance, or a private sale, there is no open and free market determining the price. So since the real reason the appraisal exists is to protect the interest of the lender, the appraisal will always be more conservative in these instances.

Julie Hassett · Answer

@Chris Kirshbaum

Julie Hassett · Answer

Thanks for your input, @Ned Carey. The property was at Chesterfield and Mannasota.

At $74K, if financed with 20% down, the cash flow numbers worked very well. 20%+ CoC.

But without it appraising, no full financing available.

We could buy with cash (or throw a big additional chunk in), but "equity kills cash flow".

And then, when ready, a cash out re-fi appraisal will always come in low.

I'm really trying to wrap my head around how to do this buy-and-hold thing right and well, but I feel like I get stymied left and right!!

Russell Brazil · Answer

The appraiser has to go into the property and the only way to do so is to gain access through the listing agent. Listing agents talk to the appraiser, a buyers agent, and the buyer can not talk to the appraiser.

Sebastian Taylor · Answer

Thanks, Russell! I don't understand how the listing agent talks to the appraiser. Do you bring all comps yourself at  meeting with appraiser, and go over features of your house?

I thought they come to do a quick view to make sure the property is in fact where it is, and not run down, other than that, they use MLS after the visit. I cannot believe they know the price before they go to the property, and are willing to discuss the price with a listing agent.

What is the $$ Value of a Lead Free Rental?

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