Appraisal for a 10 unit estate sale came in TOO HIGH!

[Christopher Morin]

I had been talking to an agent (first mistake I know) who alerted me when a portfolio that her PM company managed for years passed down to 5 heirs via probate.  It is a semi-turnkey property, 10 total units over 3 buildings and not yet on the market.  I put in some verbal offers and got a tentative yes for $377,000, with the caveat that I could come up in price if the actual insurance/taxes/MX/mgmt came in at lower numbers than expected. 

Well the rent roll and pro-forma came back and things were looking good and could come up as high as $517,000 up to w/ 80% LTV. I had significant leeway in my purchase price with conservative 10% vacancy, 20% maintenance (actual of 16%), and 10% management,

With those numbers I yielded a 8.3% cap rate, $1,200/mo cash flow, and 13.6% cash on cash.  I was likely going to get it for less than 517k anyway.  Additionally, there is about 50k instant equity to be gained just by raising a on few units to market rent, and more room for curbside improvements and possible higher rents.

Well they decided to order an appraisal, and the appraised value came back at $686,000!! Which is good for them, but totally out of my profitability range. It brings my Cap rate down to 6% and my CoC down to 4%. Not okay, even at the high end of the rent range. I haven't seen a copy of the appraisal yet, but I'm just afraid they will completely ignore a my offer, which will be much lower than the appraised value.

My question is this...

How valid are multifamily appraisals?  It included 2 x 4 Unit buildings, and half of another 4 Unit.  Do they use comp sales from sq footage? or similar area cap rates and comparable cash flows?  Part of me wants to discredit this appraisal so that the sellers don't get $$ in their eyes.

Will it likely sell close to this number?  I'm in the Florida Panhandle, Fort Walton Beach/ Destin.  I think I'm going to try and capitalize on the fact I'm purchasing all at once rather than individual sales and closings.

I think there is a lot of value in increasing rents here, and some after reno-upside in this property... but as my first multi-family/protfolio purchase, I think I need to hedge my risk and have some already existing cash flow.  Maybe I'm just being to stingy and need to increase my numbers. 

Eager for feedback.