It’s been a fun day. I mean, it isn’t everyday I get to save somebody cash money!
Here is what happened:
I’ve got a client who is buying a piece of investment property. Part of it is vacant and part of it is occupied. The appraiser used the last stated rent value for the vacant part of the building. That value was less than the current rental value of the occupied part. There are 3 ways to value real estate….market value (driven by similar sales), income approach (driven by rental income) and replacement cost (driven by construction costs.) For a piece of investment property, you guessed it, income approach is used. That means you take the total of all rents and multiply them by a cap rate or a gross rent multiplier (GRM).
Since this appraiser used some outdated rent value for the vacant part of this building, that threw off the appraised value since it is such a simple formula. It appraised for $4k less.
I called the loan officer to see what we could do. He said they might be able to use the lease I had to establish fair rent values. I told him to work on that, but I would see if there was any chance of the seller reducing the price to appraised value and NOT to do anything until I found out.
So, I called the listing agent and told her the deal. I told her the potentially complicated steps we might have to go through to get the value up and that any buyer who would be getting financing would have the same issue. After that, I called my buyer to tell him that I though either way, we would be in okay shape. He obviously was on board for the seller reducing the sale price. I told him it was a long shot and not to get too excited.
A bit later, I get a call that the seller will reduce the sale price by $4000. I am kind of shocked since I was really rolling the dice. It really would have been easier for me to have just let the loan officer get the appraised value up to the contract price, but I wanted to see if I could get the place for less for my buyer. One quick call and a cleverly worded presentation saved my client $4000. He is very happy…….and I have never been so happy to make less money!