CMHC apprasier undervalued friends property - advice needed

[windsorlancer]

Hello,



I am writing this post on behalf of a friend seeking advice on his situation.



My friend wants to purchase a sixplex (currently zoned as fourplex residential). He and the seller agreed upon a price of $765, 000. Given comparables in the area (eg: triplex next door selling for $445, 000 as well as others), the property having over 8.5 cap rate (Toronto) , and the area going through a major transition phase, he thought he was getting a great deal on the property.



He wanted to put the minimum of 10% down and thus required a CMHC insured mortgage.



The property passed inspection, but CMHC required the property be appraised. CMHC sent their contracted appraiser out to the property, who assessed the property at $635, 000, which my friend believes is a gross undervaluation. Because of the appraisal he is being told that he does not qualify for a conventional CMHC insured mortgage.



He still wants to buy the property, but is unsure as to how to go about it. He is not happy with his current mortgage broker who doesn’t seem to be of much assistance.



I would appreciate any advice you could provide me to assist my friend with his situation.

 

[Thomas Beyer]

CMHC frequently is on the LOW side of values. Thus, what is an 85% loan-to-value mortgage ends up being 70-75% loan-to-price.

This is normal.

With a 6 plex you cannot get 10% down .. only 85% LTV.

Perhaps (or even likely) CMHC used only 4 legal suites as income, not the 2 add`l "illegal" ones !

Option 1: get the lower CMHC mortgage, or
Option 2: get conventional financing, or
Option 3: ask for add`l seller financing, or
Option 4: don`t buy it.

Also, how do you know it is an 8.5% CAP rate. What expenses, rents and vacancies did you use ? Real world ones or realtor enhanced (often fiction based) figures ?

 

[windsorlancer]

Thanks for the input Thomas. I cannot speak specifically about the numbers, but it is my understanding that my friend does follow the REIN system to determine CAP rate/cash flow. The numbers were provided by the Realtor (Good point about the figures being inflated by The Realtor). Having said that, I attended with my friend the day of the inspection and did confirm rent rolls with some of the tenants. The place is fully tenanted and all the fixed expenses do seem to be reasonble.

 

[Thomas Beyer]

QUOTE (windsorlancer @ Nov 14 2009, 08:39 PM) Thanks for the input Thomas. I cannot speak specifically about the numbers, but it is my understanding that my friend does follow the REIN system to determine CAP rate/cash flow. The numbers were provided by the Realtor (Good point about the figures being inflated by The Realtor). Having said that, I attended with my friend the day of the inspection and did confirm rent rolls with some of the tenants. The place is fully tenanted and all the fixed expenses do seem to be reasonble.
CMHC would use formula`s for expenses .. around $3500 per suite per year ..

I find 8.5% CAP rate hard to believe at that price ! But then it is GTA .. rents are high ..

Ask appraiser if he treated asset as 4 or 6 plex !

 

[windsorlancer]

I will pass that info along to my friend. The property needs some work, so my friend believes that with some renovations he could increase rents and with so much development going on around it, both he and I believe that property should appreciate quite significantly over the next five to ten years.

 

[Thomas Beyer]

QUOTE (windsorlancer @ Nov 15 2009, 10:04 AM) I will pass that info along to my friend. The property needs some work, so my friend believes that with some renovations he could increase rents ...
only on new tenants in Ontario !

What are rents today ?

 

[Nir]

QUOTE (windsorlancer @ Nov 14 2009, 08:32 PM) the property having over 8.5 cap rate (Toronto)

Is the monthly rent higher than $10,000? if it isn`t then most likely it is not 8.5% CAP.
don`t believe a word the agent is saying, not because 90% are liars (ha ha), but rather 90% do not know how to estimate CAP reasonably.
some RE agents are great but not all belong to that top 10% group. Good luck.

 

[RedlineBrett]

I had something similar happen with a REIN client of mine a couple months ago.

We used this low CMHC appraisal to our advantage. It`s not your friend that is in trouble it is the seller... no one will be able to get CMHC insurance on this property for any more than the CMHC appraised value. If he wants his price he is going to have to wait for a buyer that can pay cash for the difference... and you know how often cash buyers for retail property come around...

When this happened to us we went back to the seller and said `look, we can`t buy your property without this financing and the next guy in line is going to have the same issue`. We agreed on our higher original offer but the seller had to VTB the difference. We actually got a promissory note (interest free too) because we didn`t want CMHC to see the VTB.

Great opportunity here!

 

[Thomas Beyer]

QUOTE (RedlineBrett @ Nov 16 2009, 09:01 AM) I had something similar happen with a REIN client of mine a couple months ago.

We used this low CMHC appraisal to our advantage. It`s not your friend that is in trouble it is the seller... no one will be able to get CMHC insurance on this property for any more than the CMHC appraised value. If he wants his price he is going to have to wait for a buyer that can pay cash for the difference... and you know how often cash buyers for retail property come around...

When this happened to us we went back to the seller and said `look, we can`t buy your property without this financing and the next guy in line is going to have the same issue`. We agreed on our higher original offer but the seller had to VTB the difference. We actually got a promissory note (interest free too) because we didn`t want CMHC to see the VTB.

Great opportunity here!
of course that is what many buyers, including us are attempting .. and it sometimes works but not necessarily !

Some sellers, many even, decide to not sell then !

But of course overall, less money for mortgages, be they insured or un-insured, has a negative impact on pricing .. and we have seen SOME, albeit very little, pullback of prices or rising CAP rates .. only in Edmonton where prices were ridiculous in the 120`s to 140`s/door for average .. they are now down to 80`s to 100`s where they should have been all along !

 

[RedlineBrett]

QUOTE (ThomasBeyer @ Nov 16 2009, 10:33 AM) Some sellers, many even, decide to not sell then !

But of course overall, less money for mortgages, be they insured or un-insured, has a negative impact on pricing .. and we have seen SOME, albeit very little, pullback of prices or rising CAP rates .. only in Edmonton where prices were ridiculous in the 120`s to 140`s/door for average .. they are now down to 80`s to 100`s where they should have been all along !

I have seen a number of sellers pull themselves off the market after a low CMHC appraisal... They have been told CMHC may consider another appraisal after six months but who knows... unless the comps change these guys will be in the same boat.

Multifamily in Calgary is still hovering around 150-200/door which makes no sense but then again there is very little multifamily product available here.

 

[luckyluciano]

What your friend was trying to buy is a legal fourplex. If your friend is successful at purchasing he should consider the same concerns which CMHC and the appraiser had! What would the property be worth if a by-law officer puts a red tag on his front door and orders him to remove the two illegal kitchens? As a professional Real Estate Agent, I have clients who have been shut down. Illegal units are a dime a dozen, especially in the city of Toronto.