Deal didn't appraise, twice. Would you cancel this contract?

Question

Hey everyone, I could really use some advice on a deal I have under contract. It's a massive rehabbed 4-unit building in Marquette Park in Chicago. Currently under contract for $451,000 but has appraised at $400k and $380k. It would be the highest sale in the area, but with good reason. It's significantly larger than any other 4 unit building that has sold. Projected net monthly rent of $2000+. Two of the units are already rented at $1872 and $1350. The largest unit is still available and another unit comparable to the one that rented for $1350. The reason I wanted this property in the first place was because of an income-based approach. The projected net cash flow is so strong. It would be a turnkey kind of situation, sellers are huge in the market and flip/hold so many properties in this area. They would be my property managers as well and I have the utmost confidence in them. I'm just so concerned about the fact that it hasn't appraised now, twice! Both appraisals didn't seem like they were giving a very accurate picture. However, if the market takes a dip, areas like this get hit hardest. I have no idea what the property will be worth in a downturn or after a downturn. The seller is willing to come down 8k and sell it to me for $442k. But are the two bad appraisals enough of a reason to walk away? Would love to hear your thoughts. I'm so torn because of the cash flow potential.

James Wise · Answer

That's a pretty large difference between contracted price & the appraised price x2. Safe money walks on this deal.

Theresa Harris · Answer

If two separate appraisers said it was worth $380-400K, then don't pay more than that.  The seller will have the same problem with the next person if you walk away.

Charlie MacPherson · Answer

@Nikki Kofkin I don't remember who here on BP said it (sorry), but in one of the podcasts I listened to, they said NO ERASER MATH.

Meaning that you let the actual numbers speak.  Run your comps and your budget for the property.  No rose colored glasses.  No "I'll just ignore this little thing over here".

If two appraisers said it's that far below your contract price, I'd think twice before proceeding.

Curtis Bidwell · Answer

@Nikki Kofkin  Here’s a contrarian thoughts to consider:

If your primarily looking for cash flow this is not a bad deal, in my area it wouldn’t last a day on market.  If you take the $1872, 1350 (and JUST go $1350 on the other 2) you have $6k income on a $442k price (1.35%  purchase to rent ratio). That’s a solid return — assuming you don’t have high expenses.  Have you seen a couple years of tax returns on this property to verify income and expenses?

As a 1-4 unit it will only sell based on recent sales of like-kind comparables.  That’s the appraisers job.  Your seller is probably looking to get a price based on income like a commercial property (5+ units). He may need to be educated in this regard to help him get his price in line with the appraisers.

BTW during the downturn of 2009ff, I never lowered rent on an existing tenant.  Only on empty units.

Best of luck to you!

Ron S. · Answer

Generally, when an appraisal comes in lower than the contract price, the seller immediately splits the difference 50/50, and you can haggle from there.  The fact that they only offered to go 15% down from the higher appraisal is a red flag.  Seems to me that they invested too much into the property and now have an overpriced property for the area.  That's their problem, not yours.

Have you had your inspection yet?  Part of them wanting to keep the price higher could be the fear of inspection repairs/credits.  What I would do if you really love the property is tell them you'd be happy to pay $400k with the property as-is (still do the inspection but if the costs are reasonable, you'd fix after purchase).  This sounds like you're offering them something when you still have an out if the inspection items are too much.

As others mentioned, they will have the same problem with any buyer and they know it.  Don't let them trick you into paying more than you should.  I once had a house under contract where the appraisal came in lower and there were foundation repairs needed.  I told them to drop the price to the appraised amount and fix the foundation.  They said they couldn't afford to do both and gave me the line that "there are other buyers lined up", so I said I'd pass and they can go to the next person in line.  Two weeks later they came crawling back and wanted to help "fight" the appraisal.  I told them I had moved onto my next property already.

Best of luck!

Henry Lazerow · Answer

Appraisers almost always make deals appraise out right at contract price even if they are over priced a little the only exception is when deals way overpriced so I'd be very cautious if move forward.

Just keep pushing seller to reduce contract down to the appraisal price. If two appraisals say no it's unlikely they will be able to sell it to anyone else for more.

Caleb Heimsoth · Answer

@Nikki Kofkin if you’re a realtor you understand you can’t use the income approach on a 4-plex right? It’s all based on comps.  It didn’t appraise twice, time to walk away.

Jake C. · Answer

Two big assumptions here:

1- "so long as the rents hold up"

2- possibly reduce other costs in a downturn

Not saying these are bad assumptions, but they are the difference between surviving a downturn and foreclosure.

Jake C. · Answer

If two appraisals are telling you it's a lower value, I'd err on the side of caution here as that is likely the market. You said it, and it's absolutely true, in a downturn areas like this get hit hardest. Even if you bought it at $400K, you'd be into this at $100K per unit....pretty rich for an income oriented approach in an area like this IMO.

Kai Van Leuven · Answer

@Nikki Kofkin

I would see this as a huge opportunity! Let the seller know what both appraisals came in at.

Send them on over to the other agent and simply say “at our current price this place will not sell. To me or anyone. I feel like the sellers are completely out of line with their price looking at the comparables from 2 Appraiser’s. We can go out of contract but you are going to have the same problem with any other buyer.”

This puts them in the position of pulling the listing or selling to you at the price of the appraisal. The only thing that trumps this would be cash.

Had this happen once and came out smelling like a rose. Good luck!

Deal didn't appraise, twice. Would you cancel this contract?

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