Determining Multifamily ARV before purchase

[Michael Taylor]

I am in contract to purchase a 4 family apartment. The contract is for $222,000.00. I estimated that the ARV would be $400k and I budgeted $75k for rehab. 3 of the units need a lot of work. My contractors are coming back with quotes of $75k - $100k. My broker asked me if I am 100% sure the ARV will be $400k. If not, I will have to come out of pocket to make up the difference. Now I'm nervous because there aren't very many comps in the area. Also, every time I get a property appraised I feel like the appraiser tries to low ball me because I'm an investor. Any suggestions on how to confirm an ARV?

[Dan Maciejewski]

Is there a prepayment penalty in the initial loan or can you refi as soon as you rehab and rent up?  

Is the worst case scenario that you cannot refi and have to hold for an extra period, or is it that you are borrowing the funds and lose money because you are out 50k for the rehab/refi?

You can't be sure of what an appraiser will come back with. I have seen 3 appraisals in the past month come in over 10% below what everyone thought they should /contract price. All of them used faulty comps / went too far back in time / overstressed neighborhood subtractions. I had one take over 10% off a comp to make her numbers work! And while plenty of people say that you can get them overturned or adjusted, good luck with actually doing it. They are all subjective, no matter what the USPAP Standards claim.

You can cancel the loan and try again with a new lender but then you are paying $1,000 a pop to try to get a refi.  Your inspections should carry over, though!

The bottom line for the greenlight should be, "What is the worst case scenario, and can I weather that?'"  Plan for the best prepare for the worst.

Good luck!