Appraisal before BRRRR

[Jee Lee]

Need some assistance. I have a home under contract that has significant water damage from a bad roof and the home hasn't been updated in decades. The appraisal came in for $20,000 less than the asking price. Is that normal since the home needs significant updating?

The "deals" in my area (St. Petersburg, FL) are selling for over asking price. The seller has said that people are knocking on her door and offering her cash to close immediately (my offer is also cash) so I'm afraid to lose the deal if I try to negotiate the price down.

Offer price - $150,000

Appraisal - $130,000

Rehab - $50,000 (Fix roof, replace ceilings throughout home, update bathrooms, increase from 3 to 4 bedrooms, knock down some walls, update kitchen)

ARV - $250,000

[Whitney Hutten]

@Jee Lee First, good for you for having a deal and working through the steps to negotiate! That is huge. You sound emotionally attached to this property. It doesn't matter how many other buyers are lined up... if the deal works great at the higher number and you are using all cash and are 100% confident in the ARV and business plan working out... great! If it doesn't, you should pass.

For starts... it looks like they only did an as-is appraisal. Call the appraiser up and ask if they can estimate a subject-to appraisal. Then, I'd add a heavy contingency to the budget for water damage. Next, stress test your calculations with lower ARV and lower rents. Then my question to you is, do your final numbers still work for a BRRRR if you pay the higher price, do get a lower sales ARV, and rents soften? If your final numbers still work (return, cashflow, COC, and $ left in the deal) with the higher purchase price, then you have your answer and can choose to negotiate. If they don't work, then I'd put your energy into another property.