What are the risks of buying over appraised value?

[Graham Smith]

Hi BP!

I have a great off-market deal (a condo in an HOA in Chicago) that cash flows $1,000 per month and the seller wants to sell it for $415k. BUT the most recent appraisal of a comparable condo in the HOA was sold for $380K 6 months ago. The only difference is the one I am buying has been rehabbed a bit.

If the condo appraises for less than $415k (very likely), would you still buy it? What are the downsides of buying above appraisal value if it still cash flows?

Thanks!

Graham

[Joe Villeneuve]

Run the numbers.  Here is what I see:

1 - If you are buying under ARV, then you can't get it financed for the difference plus the DP (assume 20% here). These are both out of pocket...as in cash.

2 - If the ARV is $35k low, and you need 20% of the ARV (20% of 380 = $72k, you'll need a total of $107k...in cash...plus any other misc OOP costs.

3 - Let's just leave it at $107k needed in cash.  If you are getting $1000/month in CF...$12k/year (if all goes perfect????), this means it will take you almost 9 years just to break even.

4 - Question #1:  Where's the deal?

5 - Question #2:  Isn't there a better use for your funds?

6 - Question #3:  Would you be interested in some land just south of Detroit, and North of Windsor (assuming the answer to Q #2 is "No")?

Now before you say something about appreciation, I will say "I don't care".  You're still wasting money that could be actually making money...more than any future appreciation would....and you're starting $107k behind.