Appraiser Toils and Troubles

This house that I'm buying is mere blocks from a large military installation. In fact, you can almost throw a rock from the property and hit the back fence of the installation in one direction. On the other side of this neighborhood is an interstate (with enough trees between the interstate and the property to keep it very quiet. This whole neighborhood borders on a very nice part of town with great real estate values.

I would consider this a pocket neighborhood, mostly blue collar folks. The area is mostly single family detached properties with a few trailers dispursed throughout.

So, I've decided to buy the property, I've found a great mortgage source (more on that later) and the appraisal is ordered.

Then I get a call from the appraiser. He likes the area, but is having difficulty finding "comps" or comparable sales in the area on which to base his value. He's finding LOW comps because of some foreclosures that always happen in this kind of neighborhood, but not many that will help me get a fair value. He's finding lots of new construction kinda comps in nearby neighborhoods, but nothing near age of the property I'm buying. So, he says, the appraisal is tricky and will take a few extra days.

When this happens, the appraiser usually has to use comps a little further from the property, and annotate why he's using them.

I don't get too worried about this kind of situation. It's happened to me before and everything worked out pretty well. This usually means that many of the homes in the area have had their current owners in them for many years. I take that as a good sign.

So, the few days pass and the appraisal comes back for $85,000, or $5,000 less than what I'd base my numbers on. So, I have to review them...remember, I've got $1,000 of my money tied up in the binder. That's all. If the deal looks bad at this point, I can walk and I only risk losing $1,000.

So let's evaluate:

Purchase price: $45,000
Rehab costs: Around $10,000
(I include my marketing and holding costs as part of the rehab.)
At $85,000, my hard money at 70% of the as-repaired value would mean my mortgage will be $59,500.

- minus $45,000 (purchase price)
- estimate $5,000 for closing costs (probably high)

This leaves $9,500 left for the rehab. So, I can trim my rehab a little and still have this property ready to sell or rent for none of my own money.

It's still a keeper with a great spread!