How to Understand a Real Estate Investment Appraisal

The appraisal process is an important step when looking to buy a new investment property. Unless you’re paying for the property with cash, a lender will usually order an appraisal to ensure that the property is worth what you pay. An incorrect appraisal can result in a real estate investor paying too much for a property or not being able to get a mortgage at all.

It is essential to research and understand the appraisal process if you are considering investing in real estate (like rental properties of fix and flip projects). So, what goes into a real estate property appraisal? Here is a look at the process, why it matters, and why you need an appraiser in your team for your next real estate investment.

Inside the Appraisal Process

After scouring through listings and finding the perfect property for your portfolio, you finally find the ideal property for your project! However, seasoned property investors recommend ensuring that you get a good deal on the property before you close. This is where an appraisal comes in.

While investors can order an independent appraisal, many appraisals begin when asking for a loan to finance a property. At this stage, you will need to provide the lender with information about the property, such as the address, square footage, and the number of bedrooms and bathrooms. Your lender will then order an appraisal from a licensed appraiser.

Next, the appraiser will visit the property to assess its value. After gathering the necessary information, they write a report including their findings.

This report is then sent to you and your lender to compare your requested loan amount and make necessary adjustments. If the appraised value exceeds the purchase price, you may need to renegotiate your contract with the seller.

Although it’s one of our best expert tips for real estate investing, it’s important to remember that an appraisal is just one person’s opinion of value, albeit a professional one. Ultimately, it is up to you to decide how much you are willing to pay for investment properties.

Types of Real Estate Appraisals

Investors should be aware of different types of appraisals, each utilizing a different method to determine a property’s value. Understanding which type is being used can provide insight into how a property’s value is determined and which factors are emphasized.

Sales Comparison Approach

The most common appraisal method is the sales comparison approach. This method compares the property being appraised to similar properties that have recently sold in the area. These comparable properties, or “comps,” offer a benchmark for what the appraised property may be worth.

Cost Approach

The cost approach is typically used when the property being appraised is new or unique. It determines the value based on how much it would cost to rebuild or replace the property, factoring in depreciation and land value.

Income Capitalization Approach

For rental properties or other investment properties, the income capitalization approach is often used. This method estimates value based on the income the property is expected to generate, making it a useful tool for investors seeking income-producing assets.

Why Appraisals Matter

While investors can skip the appraisal process if they’re not seeking financing, most real estate experts do not recommend it. It’s essential to be informed about the market and the appraisal process.

Real estate appraisals are important for investors because they can help you avoid overpaying for a property. The appraisal process considers many factors, such as the condition of the property, recent sales of comparable properties, and the current market conditions. By understanding what goes into an appraisal, you can be sure that you pay a fair price for your investment.

Understanding the Appraisal Report

Once the appraisal is completed, you’ll receive a detailed report. Understanding its components is key to making informed decisions about your investment. Here’s a breakdown of the key parts of an appraisal report:

Property Description

The appraisal report will include basic details about the property, such as its location, lot size, acreage, square footage, layout, and condition. This section provides an overview of the property and highlights key features that could impact its value.

Comparable Sales (Comps)

This section analyzes recent sales of similar properties in the area, helping to determine the appraised value. The appraiser uses these comparable sales as a basis for comparison, adjusting for differences such as lot size, square footage, or amenities.

Adjustments

If the comparable properties differ significantly from the appraised property, the appraiser will make adjustments to account for those differences. This might include adding or subtracting value for features like extra bedrooms, modern upgrades, or a larger lot.

Final Valuation

The final valuation is the appraiser’s professional opinion of the property’s value, calculated after considering the property description, comparable sales, and any necessary adjustments. This final figure is crucial for lenders and investors alike, as it determines how much financing may be available for the property.

Common Issues That Can Impact an Appraisal

Sometimes, appraisals come in lower than expected, creating challenges in financing or negotiations. Understanding common issues impacting an appraisal helps you avoid surprises and adjust accordingly.

• Declining Market Conditions: If property values are dropping in the area, this can negatively affect the appraisal, leading to a lower valuation than anticipated.
• Property Condition: If the property requires significant repairs or is in poor condition, the appraiser may lower the valuation. Addressing these issues before the appraisal can help you maximize the property’s value.
• Inaccurate Comparables: Sometimes, appraisers use properties that aren’t truly comparable, which can skew the value. This could happen if there are few recent sales in the area or if there are distinct differences between your property and the comps.

What to Do If an Appraisal Comes in Low

It’s not uncommon for an appraisal to come in lower than the agreed purchase price, which can complicate financing or negotiations. If this happens, here are a few ways to handle it:

• Renegotiating with the Seller: A low appraisal can give you leverage to renegotiate the purchase price. Use the appraisal as evidence to request a price reduction.
• Challenge the Appraisal: If you believe the appraiser missed important information, you can challenge the appraisal by presenting additional comparables or documentation that supports a higher value.
• Requesting a Re-Appraisal: In some cases, errors or discrepancies may warrant a second appraisal. Requesting a re-appraisal can provide a more accurate reflection of the property’s true value.

Who Can Conduct an Appraisal

Once you know where to start investing in real estate, you will need to hire a licensed appraiser to get the most accurate appraisal. Appraisers must have a certain amount of experience and education before becoming licensed. When looking for an appraiser, ask about their qualifications and experience.

By working with a qualified appraiser, you can ensure you get an accurate assessment of your investment. In the case of rental property, knowing exactly how much a rental unit is worth gives you a better grasp of the rental income it will produce—directly influencing your investment’s cash flow.

How to Improve a Home’s Valuation When Selling

Can you improve an appraiser’s report or valuation for a property? If you are planning on making improvements to a fix-and-flip property or other investment before selling it, there are a few things that you can do to increase its value:

1. Make Necessary Repairs: This includes fixing a leaky faucet or repairing damage to the roof or foundation.
2. Renovate Outdated Areas: To increase the home’s appeal, consider updating key areas like the kitchen or adding a fresh coat of paint.
3. Add Buyer-Appealing Features: Energy-efficient appliances or security systems can boost the property’s value.
4. Tidy the Landscaping: The exterior is the first impression, so make sure it’s well-maintained and appealing.
5. Deep Clean the Interior: A clean home leaves a better impression and can positively impact an appraisal.

Use Privy to Find the Best Real Estate Deals

When the next best real estate investment comes through Privy, it’s great to have an appraiser readily available! Adding a reliable appraiser to your real estate investing team means you have an expert ready to review real estate investments to avoid missing a deal.