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Storytime: When Appraisals Fall Short

Written by The Group CRE | Oct 16, 2024 2:15:00 PM

Recently, a buddy of mine just sold a 4-unit building in Long Beach.

We're talking $600,000 per unit and $628 per square foot. Crazy numbers, right? 

‍For reference – LB has been at around $300,000 per unit and closer to $315 PPSF.

Here's where it gets interesting: The deal nearly went off the rails when the appraisal came back $300K below the contract price. Ouch! 

But plot twist – the buyer's deposit was already non-refundable. 

It went something like this:

- First appraisal -

Buyer: "Uh, Houston, we have a problem. Appraisals' $300K short."

Seller: "Not my problem, pal."

Buyer: "Okay, let's try again."

- Second appraisal -

Buyer: "It's $200K short now. How about a little discount?"

Seller: "Still not my problem."

Buyer: "Third time's the charm?"

- Third appraisal -

Buyer: "Would you believe it? $350K short!"

Seller: "Close or kiss your deposit goodbye."

Buyer: "Fine, we'll close." 

 

And just like that, deal done! 


 

So, what can we learn from this rollercoaster?

  1. Do your homework! Before you start throwing money around, make sure you know what you're getting into. The market's wild right now!
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  2. Expect the unexpected. Appraisals coming in short? Insurance quotes doubling? Welcome to real estate in 2024, folks!
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  3. Have a Plan B (and maybe C and D). Things can go sideways fast, so be prepared.
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  4. Know your stuff (or hire someone who does). Local market knowledge is gold. Don't skimp on expertise! Ask the local brokers where they are seeing pricing trade. Those sales comps you see on Costar, are not real!
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  5. Watch those deposits. Know exactly when your money becomes non-refundable. It might save your bacon!
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  6. Multiple appraisals might be needed. Sometimes one just isn't enough. But remember, more appraisals = more time and money.
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  7. Negotiation is an art. Sometimes you gotta stand firm, sometimes you gotta bend. Know when to hold 'em, know when to fold 'em.

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The bottom line? Whether you're buying or selling, be ready for some curveballs.

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Do your due diligence. Have backup plans. 

 

Remember, in this market, weird is the new normal. 
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