Conflicted on an Odd Pseudo Duplex Under Contract

[Sam Rust]

I am conflicted on a property I currently have under contract and am looking for some advice! My wife and I have about $200k in cash and are looking to invest in real estate. Our near term goal is to land a property with good cash flow, longer term (6-18 months) I'm hoping to get into a larger multi-family deal.

The property in question is in Brighton Colorado, and has 3 separate structures on the lot, 2 houses (1/1, 600 sqf, 2/1 775 sqf) and a garage that is divided into two storage units. Current rents are $1095, $1400, and $160 for the larger section of the garage, market rate for storage would indicate I can reasonably charge $100 for the smaller section. I currently have the property under contract for $340,000, closing is a week from today. Property was originally FSBO at $359k, and the owner has a back up offer at full price in place. All structures were completely redone in the last two years, complete new flooring, siding, plumbing, electrical, roof, the works. I am not using a realtor on this transaction.

All utilities except trash ($15 per month) are billed to the tenants separately, lawn care is also the tenant's responsibility. Taxes and insurance are roughly $2600, I'm figuring $1000 per year in maintenance which is a bit low, but I think is realistic because everything is new. Using these figures and assuming I can rent out the smaller section of the garage I get an 8.4% cap rate. (total gross rent of $2755)

My first appraisal came back @ $320k using 2 duplexes in the $270 range, and 1 commercial/residential hybrid at $380k as the comps. My lender flagged the loan for a desk review and tried to contact the appraiser to address issues with the report (mainly centered around the 3rd comp), but of course he has not been responsive. Now the lender will not loan based on the original appraisal as they are only willing to assign a value of $260k with the info currently. My mortgage broker believes he can get his firm to pay for a second appraisal, but asked for me to find a comp or two that would be more favorable. I spoke with a realtor I trust, we both did research, and came up empty in our search.

The seller has been getting more anxious by the day as the process has dragged on, he is not in dire need of the cash, but I think does have some obligations coming up that are making him eager to close.

I have several options including:

- Getting the second appraisal, hoping for a better valuation

- Putting $145k down on a lender valuation of $260k and enjoying enhanced cashflow/watching a chunk of cash sit

- Renegotiating the seller down to a better price

- Walking away

There are a bunch of questions swirling around this opportunity, but my qualms are centered around putting that much capital (option 2) into an investment that is not very liquid, and doesn't have a clean, clear path to appreciation. I really like the cash flow aspect, that is why we put it under contract in the first place. I think that I need to establish a value for the property to me, then negotiate to it or walk. I'm just not sure how to weigh the cash flow upside vs. the downside of overpaying based on appraised value, which then impacts my sale price down the road.

I know there isn't a "right" answer, but I'd love input from the BP community. What would you do? How would you make the decision if you were in my shoes?

Thanks for making it all the way through!

[Bill S.]

@Sam Rust so if it won't appraise in this market then I think this is a big red flag. You can't find comps so if you try and sell you won't be able to find comps. Your 8 CAP calculation is very optimistic. You didn't mention costs related to property management or cap. ex. or vacancy.

I think that your rents are on the high end of the market as well. $1,095 for a 1 bd in Brighton is pretty steep. That is what I get for a similar property in the Berkeley Neighborhood. $1,400 for a 2 bed could be done but for only 800 sq ft I think that is on the high side as well. Take a very close look at the quality of tenant you are buying. Do they have a criminal history or other black marks like bad credit?

Personally, I would pass.