Would you do this deal if you were me?

Question

Hi Everyone,

In advance, thank you for any insight. I'm currently under contract for a multi-unit that didn't appraise. I'm in analysis paralysis, need peer input! Would you do this deal if you were me???

Location: Midwest, mid-size town with a number big and small companies, hospital, heavy summer tourism. I'm extremely familiar with this area.

Property: 3 unit, all 2 bed/1bath (1 of the 3 units is not allowed as rental due to zoning. It is half below grade and very well finished with 3 egress windows. )

Cost: $300k (contract) (Appraisal by the bank:$282K)

Rent: Long-term rental: If I only rent 2 legal units min rent is $3200, if I rent all 3 units min rent is, $4K. Midterm rental possible because of traveling professionals and hospital. Short-term not allowed by city.

Condition: Built in 1930, All units are updated, newer roof, new windows, new foundations, new sewer, new electric/plumbing. I should expect minimal maintenance.

Renter: B

Because of the appraisal, my lender, seller agent, 2 appraisers are now in a heated email discussion. Seller paid for 2nd independent appraisal, where appraiser massaged valuation into $305K. Bank found lots of issues with that appraisal and won't accept it.  Property didn't appraise because all multi-units comps sold in the area are in terrible condition in need of min $100k update to get them into this century. This property is updated.  I'm in opinion overload. Someone talk some sense into me. Good or bad?

Thank you,

Chris

Ko Kashiwagi · Answer

Hi Chris,

Why did 2 appraisals take place in the first place? Sometimes appraisals are transferrable, but if your lender can't accept it, either you have to follow the guideline or go with a different lender that can use it. It's probably a good idea for you to also look into the valuation yourself and figure out what you think it's worth. Paying 300k for a property worth 282k would not be a great idea.

Tristan Ma · Answer

Ok, appraisers aren't perfect or created equal. If you get 10 appraisals done on a property, chances are you will have 10 different numbers, some will be way out on the low end others on the high end and majority somewhere in the middle. So, 1 or 2 appraisals don't tell the story. You said you know the market, how do you feel about the value of this property? By looking at the numbers you gave me above, you can cashflow and your rental income is 1.1% to 1.3% of the purchase price. That is hard to find in today's market.  For a property that you say is low maintenance because of all the updates, it seems like a good deal. Remember, the "illegal" unit may not stay "illegal" forever and the short-term ban may not be there forever.  So, buy a property if it cashflows now and you might get a positive development in the future. That is why holding longterm is important.  Plus, think of potential additional cashflow for the future when you refinance. Good luck and I hope it goes well for you.

Chris Dee · Answer

Has anyone bought a property that didn't appraise because they though it was higher value than the appraisal?

Chris Dee · Answer

Thank you Ko,the seller was mad that bank appraisal came in low and ordered another one. The 2nd appraisal was clearly fudged and cannot be take seriously, but seller is using it to defend the contract price. I think if I go with another lender, the appraisal will come in similar or 10k above the 1st one.

Chris Dee · Answer

Thank you Tristan, I feel it has maybe $290 in value, but the seller won't budge from the $300k contract price. The 2nd appraisal they ordered is full of problematic adjustments that aren't even consistent between different comps.  My lender who has decades of experience and has seen thousands of appraisals, said the 2nd one is so so far outside the appraisal standards and ethics and would never be accepted by any bank.  The seller is using that 2nd appraisal to keep their contract price. Are my hands tied?