Help, low appraisal ( I am the buyer) ruining my plan.

[Samuel Carmichael]

I have a house under contract as a first time home buyer. 

No money down with Rhode Islands Renewal Program. 
They give you a 20,000 grant to buy a foreclosure. 

Right now I am 1360 dollars into the deal. 

Keywords: Rhode Island, Pawtucket, FHA, Creative Financing, Foreclosure, REO.

Forclosure sale price   170,000

My offer      152,000

Closing costs included. 

+20,000 down payment 

------------------------------

132,000

Here is the problem the appraisal came back today, and although the property needs minor work...it was only 158,000. This property sold for a high in 07 of 215,000, and in 2003 for 195,000. 

I was hoping to buy with 50,000 In equity minimum, and right now even with my 132,000 I am up against a whopping 26,000 in equity only. which doesn't fit into my investment plan at all. 

What should I do? 

I am down to the wire, and only bigger pockets can help. 

[Jay Hinrichs]

OK so your getting a free 20k. or do you have to pay it back.

its simple come up with 6k in cash and close.. your not buying and investment your buying a home to live in... don't get all caught up in small numbers since you will be there for years.

[Wayne Brooks]

Your "investment plan" may be a bit delusional.....buy a  property for $150k, on the open market, and have $50 equity, with no money out of pocket.  You seem to be looking the gift horse ($20k grant) in the mouth a little too hard.

[Anthony Thompson]

Sam, I'm confused. Is the problem that the appraisal won't let you get the loan and thus buy the property at all, or that the appraisal is coming up with a # you don't expect and that therefore makes you think it doesn't have the right equity/debt ratio for your investment plan?

[Samuel Carmichael]

Hi Thanks for the replies. 

The appraisal allows me to buy the house. So that is not the issue, I do not see the 20,000 as a gift to help me get into a property because the ultimate goal is not about my housing it is about making money on the deal. I have to live in the home for 5 years, so I won't have to pay it back. 

So I can still get in this property no money down, and with 26,000 in equity. But I am looking for a bigger number, I plan to stick to the 50,000 in equity buy plan...but obviously after this first deal it is going to take  a lot of cash. 

This was just a creative way to finance the first one and get some instant equity. But I was very suprised by the low number, and it is really only worth it to me for say.....40,000 at the least. 

@Anthony Thompson the latter. 

the appraisal is coming up with a # I didn't  expect and that therefore makes you think it doesn't have the right equity/debt ratio for my investment plan. 

Which is to buy 2 properties a year at 70%LTV, hold for 5 years each (give or take) and sell after a 10,000-15,000 renter loan pay-down. Target is to make 50,000 on each deal. Two homes a year. And use the profits from the 2 deals a year to finance a larger MF. 

[Samuel Carmichael]

I guess the question is for those who have bought multiple single family house investments. Would say 36,000 after 5 years be worth it to you? Because I will be paying the taxes, utilities, PMI...and alhotugh I will have a one renter to hedge those fixed costs.....it still wasn't part of the plan.

[Russell Brazil]

The appraisal only needed to come in at $152k and it came in at $158k. You do not have an appraisal issue. You just have a misunderstanding of the appraisal process.  An appraisal will almost always be within $5k of the purchase price if not the exact purchase price. The appraiser knows what the purchase price is usually from talking with the listing agent.

[Stephen Chittenden]

It's hard to imagine why you'd be able to find a property and purchase it for 25% below its FMV.

[Zach Quick]

@Samuel Carmichael So the appraisal is only changing your 'imaginary equity'? And it's a property you plan to live in for at least 5 years? 

Just because it appraised a little lower than what you expected doesn't mean you won't make up this ground that you think you have in 5 years when you refinance or sell. I am confused, don't think I'm the only one, why this changes anything for you, sounds like a decent deal with minimal down for an owner occupy...

[Samuel Carmichael]

Russell Brazil that is very possibly true.

In that case is it possible the comps I hav run in the neighborhood are closer to the actual resale value?

Because I see smaller homes with only 1 bathroom, selling for 175,000

Because this was a foreclosure bought under asking price. But it is almost +\- 5000 turnkey.

[Samuel Carmichael]

@Zach Quick yes it only changes my imaginary equity. That is very true.  I am curious if anyone else has expierience with what @Russell Brazil was saying, and that the appraisals usually come within 5,000+ of the purchase price. 

[Anthony Thompson]

@Russell Brazil is exactly right, in a traditional transaction the role of the appraiser is simply "make sure the buyer isn't paying over market value and thus, that the lender's LTV is higher than it wants".

You should actually be thankful that the appraisal came in where it did - if it came in a lot higher, it might make the bank rethink the sale and want to pull it and relist it at the higher amount.

As far as your desired equity/debt ratio, 1) go by your own comps (or your agent's if you can't do comps yourself) for the value, and 2) you're going to have to wait a long time to find a 50K equity position on a retail purchase - if I were you I'd be very happy with the 26K. Many people, including investors, would be thrilled to have built-in at-closing 26K equity on their primary residence.

The bigger question is... do you want to live in this house for 5 years? Do you like the neighborhood? If you have kids (or might possibly have any in the next 5 years), do you like the schools? If you rent out the property in 6 years is it going to be an easy rent or a hard one (e.g., unusual layout, not-great neighborhood, bad/no parking, etc.)? Is the neighborhood stable or trending in a good direction?

Sometimes you have to step away from the spreadsheet formulas and think about the bigger picture.

[Samuel Carmichael]

Plot twist, @Anthony Thompson this house is being sold through RI HOUSING, and the Rhode island renewal program, and the appraisal is also being done by them.  So it seems as if they are buying back their own property. ..Would they benefit from having the appraisal so close to the purchase price? 

[Anthony Thompson]

Sam, it's hard to know the details from the outside, as far as who's paying for the appraisal, choosing the appraiser, actually (boots on the ground) doing it, whether that person is an employee or independent contractor, etc.

Also you don't know if RI Housing resells that loan on a secondary market (I don't think they do but I really don't know to be honest), or if the money that funds the program you're applying under, comes with conditions RI Housing has to fulfill, etc.

It comes down to the old "he [or she] who has the gold, makes the rules".

I don't think it's useful for you to spend time second guessing Rhode Island housing's motives or methodology re: the appraisal or deal. However, on the previous point, I will recommend reading any loan documents with a fine-toothed comb - not a summary of the loan/program, but the actual loan/program documents.

There may be additional conditions in the program (e.g., never being allowed to rent it even after 5 years are up, or only being allowed to rent it to low income people even after 5 years, etc.) and you don't want to be at the closing table (or later) and find something you object to.

Free money is great, but you may find (as I've found) that it usually comes with some pretty specific conditions.

[Karen O.]

If you're  required to live there for 5 yrs, what does it matter?  Your "expected" equity would be on paper only especially if you're not allowed to sell or turn it into a rental property. Also, the lower appraisal may be beneficial with property taxes depending on how your town calculates those.

[Matthew Paul]

in 5 years the house could go up in value , or everything could tank . You wont know till then .  You need to live somewhere . Its not a loss or profit until you sell .  roll the dice 

[Crystal Smith]

• Your offer was accepted @ $152K & your AS IS appraisal is $158K.  That's $6K more than your offer.  You don't have an appraisal problem.
• What should you do?  What a property sold for during pre-crash level, 2003 or 2007, is irrelevant.  What's relevant for Single Family homes & most commercial are sold values for the last 6 months to one year.  Since you say the property needs some work ask a realtor to provide you w/ the potential After Repair Value (ARV) of the home.  Then you'll know the Potential additional equity.  You'll naturally have to assess the cost to make the repairs versus how much equity you'll actually get.  I bolded Potential because there are no guarantees especially since you plan on staying in the property for a few years.  

[Brandon Ingegneri]

Maybe I am missing what the problem is, but it seems like you just don't have as much equity as you would like. If that is the only thing holding you back from the deal, then you have a couple of options.  1. Maybe it isn't a deal at all.

2. Close and ride it out a little bit.  It its owner occupied, you have a little more wiggle room and can let it appreciate over the next few years.

3. Forget easy street.  When your starting out, you need to build cash on hand. Buy it, work your *** off with side jobs, and pay it down while building cash reserves.  Now you have an asset, equity, and cash on hand to move forward.  

Very few deals, especially early on seem to always have a hiccup, you just need to be prepared to out think it and do what needs to be done even if it is not part of your ideal plan. That may include walking on the deal in some circumstances. 

[Bryan O.]

I agree with everyone who answered, "So?" Your appraisal value means nothing because it is imaginary numbers until you go to sell. If you are living there for 5 years then it doesn't matter. If you planned to sell in 6 months it might matter.

You are giving up your hunt for a unicorn because all you found was a unicorn dressed up as a leprechaun. I'm not sure I see your dilemma  ;)

Best of luck and happy investing.

[Samuel Carmichael]

update on this, purchased the property and here are the final details. 

134,000 first mortgage.

20,000 forgivable 2nd after 5 years. 4,000 or so a year drops off.

Acquired the property for $400 all in costs (inspections) earnest money came back at closing. 

As it sits with around 174,000, needs few minor updates. I put in a fridge and am house hacking with a friend.

Mortgage is almost $1000 on the dot, would rent readily for $1400.

[Tom Knapp]

Curious if your plan is to buy 2 houses a year and you've used this route for your first one, how do you plan on acquiring the second? Congrats on your purchase by the way.

[Samuel Carmichael]

@Tom Knapp, ya good question. I think @Anthony Thompson called it earlier in the post. Tied myself up for a bit in this property. 

I was planning to FHA househack 4plexes for a few years, but now that is out of the question.

For the 2nd house, I am going to have to buy it as a traditional investment property, and I am trying to look towards 5+ units on my next purchase. Current goal is next property to close in the next 11 months, but I want to see some great equity in it in case their is some rent suppression if the real estate bubble in China, or the Italian Banks POP. Either way, If the deal is good enough I will make it happen. 

[Tom Knapp]

5+ units you're talking commercial property. Usually a 30% down payment. I wish you luck though Im aiming to do similar types of deals however where I live we don't have many multi unit homes. I actually found some great deals in Providence. Do you know a good investment property Realtor out there?