Appraisal reports are a critical component to most real estate deals. Whether you buy for cash, fix up the property, and refinance or whether you just buy it and finance it from the start you'll find that most lenders will require an appraisal. As the borrower you want that appraisal to come in as high as possible to minimize the amount of money that has to come out of your pocket and maximize the likelihood that the lender will be happy with the report and fund your property as planned.
But - just like every professional you'll ever work with - not every appraiser is created equally.
Some are better at their job than others. And when a market is shifting quickly up or down, an appraiser's job is quite tricky. So not only should you review the appraisal report carefully you may even want to take an active role in the appraisal by meeting the appraiser and the property and explaining:
- What you know about the area (what prices homes have sold for and WHY - they typically have access to comparables but may not know the home three doors down sold for less because it was full of rabbits, cats and other animals that made the house stink more like a barn than a home - this actually happened to us),
- The work you did. We know investors that do fixer uppers that have photo books on hand of the before and after shots of the work they did. You can also include invoices to show the costs. You can also walk the appraiser through and explain what you did.
- What you'll be renting the property for and why (ideally you'll want to provide some back up in the form of newspaper articles, leases from other properties you own in the area or a letter from a local property manager).
Just remember, appraisals are an opinion of value not a scientific fact. You've probably heard some people in the industry say "A house is only worth what someone is willing to pay for it." And while that is sort of true, we also know that as investors we look for those opportunities to buy under market and create value. This can be an issue when it comes to appraisals because sometimes the appraiser will default to the safe valuation which is what you paid for it - unless you can explain WHY what you paid is not the market value.
Once the appraisal is said and done, take a close look at the report, and review:
- The comparable properties used: No two properties are the same, but to make the valuation as accurate as possible the comparable sale dates need to be very recent (max 6 months old... ideally 3 months or less), the circumstances of sale need to be similar (don't use a foreclosure as a comparison to a market sale or a non arms length transaction as a comparison to an arms length one), and th location of the property needs to be very comparable - preferably nearby.
- Value assigned to special features: For example an ocean view should command a little higher value than a home nearby that lacks a view. That is not always taken into consideration in an appraisal but it should be.
- The rent rates, replacement cost numbers and other specific details that change quickly. Once in awhile the replacement cost numbers we see appraisers use look really low. When that happens we usually ask for the contact details of the builder where the numbers came from because we'd like to work with him.:) We also will politely suggest a couple of property managers to call if the rent rates look out of date.
Whether it's before you get the report or after the report is complete, you have every right to make sure that the valuation has been done correctly. It is an opinion, and an opinion can be changed and it certainly can be influenced. Good appraisers will do their research and will get close to the best possible valuation. When you have a really good appraiser your extra efforts will be unnecessary, but then again everyone has a bad day. It's your job to just make sure someone else's bad day doesn't result in more money out of your pocket!