Would you take this Deal??

[Chris Heeren]

So I've had a tough decision on a Duplex after the appraisal came in, It has a great ROI but negative equity and would take about 16 months to make up for the gap in purchase price. Would YOU take this deal or pass?

1bd/1ba Duplex - Both units recently remodeled on the inside, a little rough on the outside. Fully Occupied on Year Leases, great tenants and my current property manager is already managing the house from the previous owner. The appraisal came in 15% less than the purchase price but I would make that up in cash flow over the next year. Here are the stats:

Purchase Price: $40,000 - Appraisal: $34,000 - Down Payment: $12,800

Current Rent: $600 & $475 = Total of $1075/mo

Vacancy Factor: 1 month ea unit (-$90/mo)

Mortgage: $180/mo (Only $27,200 based on appraisal)

Property Taxes: $65/mo ($800/yr)

Management: $65/mo (6%)

Gas & Electric: $0 (Tenants Pay)

Insurance:  $55/mo

Water/Sewer: $70/mo

Maintenance: $80/mo

Replacement Costs: $105/mo

TOTAL INCOME: $985  TOTAL EXPENSES: $620  CASH FLOW: $365/mo

Closing Costs: $700

Return on Investment $365 x 12 / $12,800 + $700 = 32.4% ROI

Instant Net Worth Loss of $6,000

The appraisal is fairly low as there are a lot of cheaper single family houses in the area and this is technically only a 2 bedroom house. I can't find any other duplex's for under $50,000 and they all need work/updates. 

[Amy Shepherd]

We've been seeing a lot of low appraisals in our area. The pressure is usually on the seller to come down in price if it is a good appraisal. Even if you walk away, the same thing is likely to happen with the next buyer. Splitting the difference with the seller is a great strategy. If you think the appraisal is bad, podcast #7 has some good info about challenging the appraisal. Hope it works out for you.