House #4 - A New First And New Lessons!

I had told you previously that we had identified House #4.  We had offered $79k on it.  Again, we based this off our financial calculations but as you may or may not know, most (if not all) residential appraisals are based off the comparison approach, not the income approach that we use.  So, the appraisal came back at $75k.

We then called the agent and said based on our contract, we now had to reduce our offer to $75k since that's what the appraisal is.  So, could we have still paid $79k?  Of course, but as I've mentioned before, the bank only loans based on either appraisal or the purchase price (whichever is LOWER).  The seller did accept our new offer but they didn't have to.  I'd venture to say 90% of the time, the seller (if they need to sell) will do this.  The reason is, the appraisal is an independent appraisal provided by someone the bank chose who has no vested interest in the deal (he gets paid regardless of whether the deal goes through or not).

So, with that being said, a smart seller will realize that unless they wait a year, no other appraiser in their right mind would change the value of a previous appraisal.  So they are stuck at a value of $75k for a little while.  Almost no buyer would offer more than the appraisal value.  Had we purchased at $79k, that extra $4k is money out of our pocket.  That brings our cash on cash return down lower as well as brings our cash itself lower meaning it extends the next house we purchase out even further.  The market is too good to be doing that.

There are 2 lessons we learned here:
-- We ordered an inspection before the appraisal came back.  Our lesson is don't order the inspection until the appraisal comes back and you have a final accepted purchase price.
-- Had the sellers turned down the reduced offer, we're still out the appraisal price too.  Moving forward, all of our contracts will say that "If the appraisal value comes in below the asking price and the seller refuses to sell at the appraisal value, the seller will be responsible for the appraisal fee.

With those 2 lessons enacted, we can go from potentially being out $500 or $600 if the deal falls through to nearly nothing.  With the market as good as it is right now, this is absolutely something that we can get away with.  It may not be the case in the future or with different types of properties.  These houses are available as fast as we want them so sellers are willing to do these things.

As a side note, I want this type of stuff to happen now and with these sub-$100k properties, not later on the multi-million dollar deals :).  Again, our worst case, we were out $600.  \these lessons happening now are VERY valuable.  Fortunately for us, we didn't have to learn this lesson the hard/expensive way, but it doesn't make it any less visible!