first Investment 3 plex offer made - appraisal low - bad investment or appraisal off?

[Paulina Purnama]

Hi guys, I'm sorry if this post does not belong in the Deal Analysis but I'm a first time investor and finally got out of my anaylsis paralysis and made an offer on a 3 plex (converted single family).

I used conventional bank financing. 30% down with 4.375 rate, $2000 closing costs. Everything was going fine but today appraisal came back at 7.6% below my offer.

List price $169,900

Accepted offer was $164,500

Appraisal came back as $152,000 sales comparison approach. He did mention Income approach was $158,000 but he did not think that was the way to appropriatly appraise this property.

I went back to the seller at $152,000 and he refused. His final offer was $162,500.

Now big question is do I pay the difference or do I walk?

I'm already out $750 for the appraisal and $500 for home inspection.

Here are the financials on the property:

It is a older SFH that was converted to a 3 plex. Built in 1957.

Unit 1: Rents for $825 and than INCLUDES heat and electricity

Unit 2: Rents for $550 and INCLUDES heat and electricity

Unit 3: Rents for $700 and that only includes heat (electric is on separate meter)

So total income is $24,900 - 8% Vacancy = $22,908 annual income.

Annual heat (for all units) + electric (Units 1&2) = $3900

Maintenance I assume 10% of gross rents = $2490 

Property Management @ 10% = $2490

Lawn and snow = $1200

Property Insurance = $1400

Real Estate Taxes = $1365

Cap Ex reserve = 10% of rents $2490 (does cap ex figure into cap rate?)

Any advice would be much appreciated. Should I walk? Does the income justify me paying over appraisal?

[Christian Belleque]

It depends on if you are using it for a buy and hold or you are trying to flip. Personally, I wouldn't make a life or death decision on a buy and hold property that cash flows relatively well over a couple of thousand off the asking price. You could also ask the seller to give you concessions at closing ie. paying closing costs, credit towards rehab work. You don't have to forfeit your $1,200 investment over $8,000 that will be negligible over the long run.