Profile picture for fsu08

First time buyer of investment property that did not appraise. What to do?

Okay, so me and my 2 partners are first time buyers seeking an investment property in Poughkeepsie, NY to rent out to college students in the area.  We have been involved in the process personally for over 6months because getting our funds together and getting approved for a mortgage has been extra tough.  The house is listed at $200,000.  We finally got our 20% ($40,000) and were ready to move forward.
Now for the kicker, the house appraised at $175,000.  We always felt the house was overvalued and want to use this in our favor. 
My feeling is, in this down economy we should not pay a dime over 175k. 
I understand our options are, negotiate a lower price, meet in the middle or fork up the extra funds.  We plan on holding our ground and not paying over 175k.  What is everyone in the communities thoughts during this period?

Thanks!
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May 27 2010 - Town of Poughkeepsie
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Answers (12)

What are your investment returns on your cash equity ($40k plus whatever you will spend in closing and rehab = your total equity). Are you earning a 5% plus cash on cash based on conservative rents, vacancy and expense figures. That would be pretty good and if you are a long term holder, and the property is in decent shape (so not too much uncertainty over the rehab costs), even if seller won't budge, it might make sense to buy. 

It is time consuming and hard to get good properties under contract and if the returns are fair based on the price, 20 years from now you won't care that you paid a little extra. Of course still try to get the price down, but never walk away from a fair deal!
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January 18 2011
Either renegotiate or walk away. Just because a seller wants a certain price, doesn't mean the house is worth it or you should pay it.
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January 18 2011
Fsu08,

What is this house worth to you?  What type of house is this?  Is it a single family?  It is a multifamily?  If it is, does it have more than 4 units?  I assume that this is a property less than 4 units.  If it is, appraisers look at comparable properties to help them figure out the value of the property that you want to buy.  That value has nothing to do with the return on investment that you will get on this property.  You should be comparing the cap rate or gross rent multiplier between this property and others on the market.  If the cap rate or gross rent multiplier is favorable, even at $200,000, then this property could be a good investment.

Your Real Estate Geek,

 Rich
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January 18 2011
If the seller is not motivated to sell, especially since this is an income property and he/she is earning cash flow, negotiating down to $175k will probably not work.
When it's not the right one, it's not the right one. It's better to cut your losses early than to put more money into this property (if needed) and may even hit the same snag when you want to sell it.
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January 18 2011
jkuhl -  had a great answer, i would read that twice, and move foward based on your needs.
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October 09 2010
I hope you used an agent to write up and present the offer.  There is a financing condition that the property must appraise.  I would use that or walk.
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May 27 2010
Make sure your deposit is protected by your contingency periods and if so, make the appraisal price your best and final offer, otherwise, walk and find a new opportunity.  Good luck.
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May 27 2010
It is apparent that you and your investor partners were not working with a buyer agent.  I suggest that since you are new at this, that you should re-group and talk with a buyer agent so that he/she can guide you through the process.  Read your contract.  If the property did not appraise you are not going to be able to get your mortgage, but then it depends the way your contract was written.  What I do not understand....if you thought the house was not worth what you offered, why did you write such an offer?  Good luck!
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May 27 2010
Oof!   You have, probably, picked one of the worst times to begin negotiating the price.  This really needs to be done well before the appraisal is performed and you need to do your 'due diligence' before putting an offer in.

Do you have a broker?  If not, get one.

Try with the price negotiation, good luck to you.  Next time, find out what the house is worth FIRST.

Good luck to you, I hope this works out.

Cheers,
Bill P.
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May 27 2010
All this is beside the point. The real point is - what is this property worth to you?  And why?  Is this a flip, or longer term investment?  I'd be very careful about fixing and flipping MF's in Poughkeepsie - there is a lot of inventory. For investment purposes, does this produce a decent return?  You should be looking for at least a 12% cap rate in this area.

If it's exactly what you want and it works for you, pay the extra money. It may be that you get much higher rents because of the college situation. The owner knows that and that is part of the value of that particular property - better ROI.

But if not, why should you even pay full price of $175K - are you looking for market value, or a good deal? I'd definitely use the appraisal as leverage, and it's always better to get the best price, so offer 170K - you are goin gto have some closing costs, right?
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May 27 2010
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Try negotiation, but if they will not come down to appraisal walk away.
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May 27 2010
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The finance contingency should allow you to walk away if the house doesn't appraise (check your contract/attorney) since you won't get the mortgage on the terms in the contract. The answer is to hold at 175k and threaten to walk away if the contract price isn't reduced to the appraisal price. If they don't drop the price then really walk away. A dead deal can always be revived if they decide to come back to you. The only ways the seller will get a sale are if they get a cash buyer (or more than 20% buyer) to pay closer to 200k or someone comes in and gets an appraisal for 180-185 or more and they agree to that price

And if you thought the house was overvalued, you should have never offered that price.
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May 27 2010
 
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