Appraisal Bias on BRRR

[Kristy Pedersen]

I'm looking at a property in Philadelphia that would need a full gut rehab. I want to BRRR it. Purchase price is 99k, renovation cost is ~100k. ARV maybe 270-280k.

My question is regarding the appraisal value. It's located in an area with a lot of similar renovations, but that are a few blocks away. If you know Philadelphia real estate you know that it's very block by block where some are good, but the next one over could be bad. This house is on a nice block, but it's pretty isolated from the renovated houses and I don't think would be considered by a homeowner looking. However, I think it would be great for a renter. Do appraisers have the same bias towards location that a homeowner looking to buy a house would or would they just look at what houses in the area sold for?

What I'm getting at is, based on houses sold in the area and condition of those houses I think the ARV could allow me to refinance out all of my capital, but I'm depending on the appraised value to be unbiased. What has been your experience with BRRR?

[Joe P.]

Originally posted by @Jared Burns:

To the extent it helps in determining your gross monthly rent, at 23rd and Cecil B. your tenant base is likely to be Temple University students. Depending on the location, finishes, etc., rents for this market tend to be between $400-$500 per bed for single family homes. 

As a former Temple student who looked at off-campus housing, I can tell you unless you've got some strong stones or a serious money problem, you probably aren't going to be living at 23rd and Cecil. :D

However, assuming you did find that very select market of Temple students willing to be that far from campus (sure, 10 blocks doesn't sound like much, but try walking or taking SEPTA in the weather with the local inhabitants and tell me how long you last), your evaluation of 400-500 per bed is correct. The price goes up the closer you are to campus. But again, I wouldn't have paid that kind of money to live in that area.

What we need to acknowledge is this area is simply no-mans-land right now. Its not Brewerytown, its not Temple U...it's in the middle. So could this be a good buy and hold? Sure. But realize the money you would put in probably won't come out until the area appreciates...and that's a big if...and you want to deal with the headaches that will invariably be there for some time until if/when it does appreciate.

Depending on comps, the buy @ 99k might be reasonable (if a little high, depending on how much work it needs). But to dump 100k into it at this stage seems crazy to me. Then again, I'm a super conservative investor trying to hit home runs, not singles. So take my advice from that perspective and with the due grain of salt.