Home appraisal is a key part of the real estate investment process, and all would-be real estate investors should seek to learn the basic ins and outs associated with it.
While many people primarily think of home appraisal as simply a necessary task before selling a home, there are actually a variety of reasons why one might consider getting an appraisal.
Related: Should I Sell or Rent Out My House?
Home Appraisal: A Multi-Functional Tool
For example, a real estate investor might get an appraisal done to track appreciation on a property he/she has invested in, which could help him/her make wiser decisions concerning rental prices or selling decisions. If the property value is regressing or remaining stagnant longer than expected, the investor might consider selling off and buying elsewhere or at least resisting the urge to invest in further rental properties in that location.
Appraisals can also provide tax deductions, as a depreciated property value – while it is in general nothing to celebrate – can at least give the owner a reduced tax rate. Home appraisal can also come into play during divorce settlements, mortgage refinancing, and loans based off of home equity, so it is definitely something worth familiarizing yourself with more regardless of whether you’re thinking of selling your investment property or not.
And if you are looking to sell a property, getting your home appraised is a fundamental step to the closing process. If you agree on a contract with a buyer but then get an appraisal for below the selling price, this can throw the contract off and put a roadblock in the process. This is yet another good reason to become well familiar with the value of your income property and the home appraisal process.
Home Appraisal: Both an Art and a Science
Something very important to understand about home appraisal right away is that it is not an exact science. One appraiser might generally skew more conservatively in his/her estimates than another, and though many states require licensing and there are some general guidelines which all appraisers follow, appraisers might use different methods and can often thus come to different conclusions.
Slow housing markets can pose a problem in the field of home appraisal due to the lack of recent sales to compare to in this particular location and the tendency for foreclosure sell-offs to skew the data when there are numbers to look at. Moreover, due to regulatory issues with The Home Valuation Code of Conduct, which incentivizes the use of more inexperienced appraisers, there have been more complaints as of late as to the quality of appraisals.
Most appraisers work with the Fannie Mae Uniform Residential Appraisal Report when looking at single-family homes. This report, which requires appraisers to look at various aspects of the real estate property and its surroundings, at least helps to provide some uniformity in the appraisal process, but even so, appraisers can come to different conclusions.
In the end, appraisers are just regular people and might end up making simple mistakes or oversights, or due to a busy schedule, might not give a home appraisal the due diligence it requires and thus end up with a problematic estimate.
Selecting an Appraiser
When selecting an appraiser, it’s possible to choose between two main types: (1) one who works for a real estate agency or (2) one who works independently.
The advantage of agency-sourced appraisers is that they often have access to data and tools that independent appraisers don’t, thus potentially giving a more realistic estimate of a property value. Independents can be a great option though if you want to get a different opinion and possibly a lower price for the appraisal fee.
Speaking of fees, it’s important to clarify fees and appraisal processes used upfront before you decide to go with a certain appraiser so that you have an exact idea of what you’re getting yourself into. There are two main home appraisal process methods out there: 1) the comparison approach, where an appraiser compares the real estate property with several other properties in the area as the main method of evaluation, or 2) the cost approach, where the appraiser adds the value of the land to the cost of rebuilding the unit to arrive at an estimate. Neither of these is necessarily superior to the other, but if you can guess which one would give you a better result, it would obviously be advisable to pursue that approach.
Fees and Foibles
Appraisal fees average around 300 dollars, but even so, if you feel like a mistake has been made or that certain things haven’t been taken into enough consideration (e.g. the new roof you added last year or the proximity of the rental property to a new park that’s being built), you can go back to the appraiser and make your case for a reassessment. One common mistake that appraisers make is allowing the original purchase price (which might have been way below or above the market value) to over-influence the appraisal price. With potentially thousands of dollars at stake, some real estate investors practically do all the work themselves and deliver a load of reports and research to the appraiser in hopes for a more favorable outcome.
This is perfectly acceptable, and it can in fact be advisable to present your appraiser with data such as previous appraisal estimates, home amenities/renovations that might be overlooked, or favorable sales information from your area. This can help save them efforts and time and can aid them in drawing a more accurate picture, so appraisers that are confident in their ability shouldn’t look at this as an insult but rather as helpful assistance that they can factor in as much as deemed necessary for accuracy.
Related: 6 Benefits of Investing in Income-Producing Properties
Overall, home appraisal is not always a clear-cut process, but it’s definitely a process that anyone involved in real estate investing should seek to learn more about since it plays such an important role in terms of both short-term and long-term potential benefits. For more tips and advice related to your real estate investment business, make sure to check out other blogs on Mashvisor.