Advice on Deal with Low Appraisal

[Dan Corbiani]

Hi Everyone,

Need a bit of advice because we haven't been down this road before...  Long story short, we have a property under contract where the appraisal came in below our offer price.  The seller isn't willing to match the appraisal so we are at a bit of a crossroad.  Do we accept putting additional cash into our first deal or do we keep our eyes open for another deal.

Original Offer:

Price: 153k ($31k into the deal)

Anticipated rent: $2,000k/month

Operating expenses: $9.4k / year (includes management, cap ex, vacancy, taxes, insurance, etc.)

Cashflow: $4.2k / year

Cash on Cash return: 13.68%

The appraisal came in at 146k and they raised some very valid points on why the property was not worth 153.  Additionally, the market is reaching the slower season so the anticipated rent has been slashed dramatically.

Current:

Price: 153k ($42k into deal)

Anticipated rent: $1,650/month

Operating expenses: $8.5k / year (includes management, cap ex, vacancy, taxes, insurance, etc.)

Cashflow: $2k / year

Cash on Cash return: 5%

So what would you do?  We were targeting a cash on cash return > 11% so these new terms do not meet our goals.  Also, putting $40k into this deal does take a substantial amount of our cash and we were hoping to acquire a second property within the next 12 months.

This market does see a fair number of properties in the 8 - 12% cash on cash return so my gut is telling me to walk from the deal.  Are there other creative things we should do to make this work?  This was a flip for the sellers so there isn't a lot we can do to force appreciation.

Thanks!