Despite the unsteady ebb and flow in today’s real estate market, we still have investors buying, and selling property. The looming recession and climbing loan rates only encourage uncertainty. This uncertainty motivates traditional and private lenders to pull back their reins. They then rely on extra ways of evaluating properties to determine the value and minimize risks. As an investor, you need to make sure you are getting the biggest bang for your money. On the flip side, lenders are scrutinizing property evaluations more now than a month ago. Whichever the case, being aware of what hurts a property appraisal is the key. So, make sure you know your exact exit strategy. Your exit strategy determines the level of rehab of an investment property. Also, it is always a smart idea to understand the process of increasing the value of your investment. Let’s discuss the 411 on Investment Real Estate Property Appraisals
☛ What is the point of an appraisal?
A property appraisal is a process through which a real estate appraiser determines the fair market value of a property. The appraisal ensures the lender the value so they can determine the level of risk. They can also calculate the loan amount according to internal and industry risk metrics. Each lender has its own formula for calculating risk and so the loan to value (LTV) may vary from lender to lender. If the subject property market seems volatile and market values are fluctuating the lender may need a second report. Usually, a Brokers Professional Opinion BPO or an ARR/CDA appraisal report may be the solution. Both are a comparative market analysis of the subject property. The lender will tell you what type of appraisal they are looking for to determine your loan.
☛ Most Common Reasons Lenders Will Request an Appraisal
- Refinance/Cash Out
- Rental Loans for SFH Portfolios, Multifamily and Commercial Properties
- Purchase (Single Property or Portfolio Buyout)
In most cases, traditional lenders always request appraisals for any type of real estate loan. In recent years, as it become more common for investors to borrow from private lenders, they’ve become the “Go-To” funding option. As part of their strategy, Investors have grown accustomed to the rapid response to executing closings. It is why investors favor private lenders. Now, it has become a common practice for private lenders to operate like traditional lenders. So, it has become normal for private lenders to require appraisals as well. On average traditional lenders will take about 45-90 days to fund. Private lenders can take as little as 5-30 days to fund if all the ducks are in a row. The subject property market area determines how quickly you can get an appraisal. Two weeks turnaround is normal. In some markets, appraisers are 20-45 days behind. It all depends on how inundated the subject property area is. Unfortunately, neither the lender nor the borrower is able to speed up the process. Nor can they influence the appraisal process.
☛ “No” Appraisal Mortgages
There are some private lenders that don’t need appraisals. Although they are a bit rare, they do exist. You can expect to pay a higher rate (12-18%) for a loan and your terms (3-9 Months) will be much shorter. Usually, this type of mortgage is offered to strong borrowers with significant equity. Great credit (700+) is a plus. But experience in investing (5+ years) and 5 or more properties is the key to getting the benefits of no appraisal mortgages. Certain renewals refinance, and existing extensions of credit may skip the appraisal process. Especially, if a recent appraisal was performed within a 2–9-month period by a certified appraiser. Ultimately, it’s up to the lender, not the borrower. Keep in mind, that most lenders may have internal policies. These policies may require you to get an appraisal using appraisers in their network. Or they may use a nationwide Appraisal Management Company (AMC’s). It’s up to the lenders’ discretion which direction they want to go. Either way, if you want the loan you have to play by the lender’s rules.
☛ Appraisals for Selling or Refinancing
If you are selling, there are many things you can do to ensure your property is valued accurately. Taking a proactive approach before you lift a paintbrush is paramount. Here are a few exit strategies that will dictate the level and quality of improvements needed for your property.
- Selling to Civilians (Homeowners)
- Selling to Investors
- Refinancing and holding (after a short-term rehab loan for a long-term fixed loan)
When you are deciding which improvements to implement, remember some improvements are more costly than others. Plus all should be assessed against the amount of value you’ll receive in return. For example, if you are renting the property as an investment or selling a turnkey property to an investor, the improvements would be contractor-grade. Higher grade improvements for civilians (homeowners) would be best. Gauging the profitable improvements to focus on is a mental muscle that is developed with time and experience. The faster you learn it the faster you can avoid making costly mistakes.
☛ How Much Do Appraisals Cost?
Usually, the investor seeking to buy or refinance an investment pays the property appraisal fee. Investment property appraisal costs vary by the type of appraisal. From Single Family to Multifamily to commercial…they all require different forms. Also, the location and the type of property that is being inspected determine the fee. The fees ranges are as follows and may be more or less:
- Single Family from $400-$1000
- Multifamily from $600-$2500 (Fee determined about the number of units being inspected)
- Commercial $5000+ (Fee determined about the number of units being inspected)
☛ How the appraisal process works
A certified residential property appraiser will be at your property for about 60 minutes for a single-family. It may take a couple of hours for multifamily assets. So, your goal is to make their job easy. Start by clearing the way and shining the brightest light possible on your property’s favourable features. Remember, the appraiser will be taking pictures of all the rooms in the subject property to provide visuals to lenders and buyers. The pictures are the key factor in the appraisal report. They help lenders and buyers understand each room’s condition, defects and strong features. You’ll especially want to focus on areas that can hurt your property appraisal. Here is a list of six of the most common areas that should not be ignored and how to fix them.
☛ Six of the most common areas that should not be ignored and how to fix them.
1) Exterior Curb Appeal – this is the first impression and walking up to the front entrance should be a good one.
Fix-It Tips: Clean up the yard, remove all debris, and trim up bushes and trees so they are nice and neat. Add annuals or perennials for a burst of color, and some dark mulch for a little contrast.
Start with a fresh coat of paint applied to the exterior of your home. If you are on a budget, painting the front façade, your front door and shutters in a matching color will set the right tone for the appraisal. Keep in mind that the last thing you want is for an appraiser to come and think…”Oh what a dump.”
In some cases, garage doors often comprise a good portion of the front of a house. Updating the garage doors with new ones is almost always a plus. Also replacing a mailbox and adding a front door mat is a plus.
Fix-It Tips: When showcasing investment property, you must make sure the property is decluttered. If you have tenants, lay down the law and have them clean up their apartments. Let them know you are having the property inspected. Make sure you go to each unit and go over what they need to clean up and unclutter. Revisit a few days before the scheduled site visit to make sure everything is cleaned up.
If you are selling to an investor or keeping the asset, whitewash the hallways, and common areas. Add bright lights to ensure maximum brightness. Keep in mind that if you are selling to a potential homeowner you will need to dress it up. Focusing on modern finishes and details, you may have to spend a bit more to make the property look good. For investors wanting a turn-key property, clean, safe, and ready for tenants is perfect. Remember that painting the interior is one of the simplest and least expensive improvements you can make with maximum returns. Maintain neutral colors that can appeal to most people and those same colors will help brighten any room. Also, mats and runners are a good accent for common area hallways. I remember visiting a property and the investor had painted the hallways all bright fluorescent yellow. I asked why he selected that color and he said “it was the cheapest paint I could buy…plus…I like green!!!” ☹ When in doubt…use white!!!
Replacing your blinds if they are dated or dark is a must in some cases. Are any of the slats in your blinds broken, missing or dirty? Replace those that are damaged and clean any that need it. A little elbow grease goes a long way.
Also, on the day of the appraisal, make sure the common areas are swept, mopped and clean before the appraiser arrives.
3) Kitchen and Bathrooms
Fix-It Tips: Kitchens and bathrooms are frequently what hurt a property appraisal the most. On the flip side, they can also bring the most value to an investment property. In the kitchen, you can freshen things up by refacing cabinets. Also, replacing outdated pulls, switch covers, electric box covers, light fixtures, and countertops. Swapping out old appliances for energy-efficient appliances is great. Updating your sink and faucet with a more modern one could be what your kitchen needs. Keep in mind that for potential homeowners doing modern upgrades is key. Investors are comfortable with contractor-grade upgrades and that goes for appliances for both parties.
In your bathrooms, cabinets can be updated with paint. Replacing the medicine cabinet and the toilet seat are two quick upgrades that make the bathroom look nice. Also, install a new faucet and light fixture with bright lights. Also, whitewash the walls or paint them white for a brighter cleaner look.
Fix-It Tips: Maximize subject properties’ square footage. Declutter and a fresh coat of paint. Replace any curtains and window shades that are too dark and make the most of the space available. Replace rugs or linoleum that looks dated or frayed. Paint molding and window frame bright white. We like painting the living areas a buck skin (dark beige) and all molding and windows bright white. It’s like framing a picture…it pops.
5) Unfinished Basement
Fix-It Tips: Most often than not basements are unfinished spaces used only for storage and junk. Increase the value of your property by storing these items elsewhere and turning the basement into usable living space. Whitewash the basement from top to bottom. If you have old ceiling panels, you can pop out the panels and paint the frames and panels separately. This simple thing may give your basement a great facelift. Also, any mildew odours or moisture in any basement are not a good thing. Keep in mind that too much moisture in dark areas of the house leads to mold and that requires mold remediation. That is a costly procedure that you must avoid. It’s even worse if the appraiser finds out you have mold. Older homes with stone basement walls can sometimes build up moisture due to rain runoff. Two ways to minimize moisture buildup are sealing the walls. You can use Dry-Lok and kill the musty smell by using Kilz. Both go on like primer and you can paint over it to finish the seal. This should keep the musty smell in the basement to a minimum. Additionally, Kilz is great for killing odors. You can use it for rooms that occupied long-time smokers or animal smells.
Convert your basement into a studio apartment and rent it out. Too small for a studio? Keep in mind, that you may have to visit the county to see if you can get permission to convert the basement into an apartment. If it is multifamily, convert the space into a common laundry area. If the basement is big enough, you can convert the space to a rentable storage area for your tenants. Which will add to your investment property’s total square footage plus you can earn extra cash. By adding walls, insulation, an acoustic drop tile ceiling, and flooring you can add some serious living space. Adding square footage and livable space to your investment property is one of the easiest ways for increasing your home’s value.
6) Home Systems and Appliances
Fix-It Tips: Big-ticket items can be costly to update, but they often have a good return on investment. Knowing which systems to upgrade is the key. Examples of big-ticket items are installing a new HVAC system, replacing the roof, updating energy-efficient windows, or replacing exterior siding. The roof is particularly one of the items that last for 15-20 years depending on the materials used.
Both electrical and plumbing issues should be resolved prior to the appraisal site inspection. Any defects in both critical systems can cause a major snag. So, if you’ve noticed a leak, make sure it’s repaired, and that stains are appropriately cleaned and concealed. This is an item that will not be overlooked.
Here are a few more suggestions that will help your appraisal go smoothly. As you can see, making a few improvements here and there can go a long way toward adding extreme value to your investment. The level of improvements that you can provide is linked at times to your skill set. I have a client that has been buying undervalued properties with acreage in smaller markets. He took a duplex and converted it to 6-unit multifamily using their learned skills in building. Using county unit density per acre requirements, you can build more units and you can increase the value of any property exponentially.
☛ How to prevent a low appraisal
It’s possible, that you may have missed something. You may have to respond quickly to an issue pointed out by the independent certified appraiser. Most investors won’t be able to fix everything in their property, however, there are ways you can prepare yourself to increase the chances of getting a fair market value evaluation. Here are the most basic things to consider while preparing for the appraisal process.
☛ Four More Things To Do To Prepare for an Appraisal
1. Clean up messes and clutter
A clean property totally decluttered characteristically makes rooms look roomy and more attractive to appraisers. A messy and sloppy property ultimately prevents the appraiser from having a better picture of the subject property’s features.
2. Know Your Market
Brush up on your local market. Research the current local housing market conditions and the sales prices of recently sold homes within your area. Educate yourself and consider your property’s value compared to the neighborhood or city the subject property is in, and area comps. Investigate if the surrounding area is seeing rapid growth, is it stable, or is it slow? Especially now that there has been a boat load of exiting states after the pandemic.
3 Provide Proof of Rehab
Compile a “brag sheet” or a folder of all home improvements. If you or your contractor already prepared a “Scope of Work” (SOW), and the work has been completed include it in the Rehab folder for the appraiser. If you’ve made any upgrades or fixes to your property, like a brand-new roof or HVAC, show the proof to the home appraiser. We include a binder with all receipts, SOW and before and after pictures for all work done on any of our rehabs. Make sure all the details including the date of installation and its cost are listed for the appraiser to see. Remember, make it easy for the appraiser.
4. Inspect the Interior and Exterior Yourself
Conduct a full inspection yourself with a notebook or a recorder on hand. Carry a flashlight and take a lot of notes. Take note of all concerns when you walk through the inside and outside of the property. If there are any repairs that need to be corrected. Things like fixing broken appliances, fixtures or cosmetic concerns. Do this before the certified appraiser visits.
☛ These are the most common types of appraisals:
Appraisers usually follow a standardized form, known as the Uniform Residential Appraiser Report (1004), to evaluate the appraisal value. The report has three main factors that the appraiser will report on.
- 1004 – As is Value – common appraisal with property evaluation, area comps, property pics, etc.
- 1007 Rent Schedule – Usually piggybacks off the 1004 appraisal and includes a report using local rental comps in subject properties market.
☛ Three Main Factors that the appraiser will report on
Here are some examples and questions the appraiser may consider in your inspection.
NOTE: Urban Development and Local Market Can Affect Your Appraisal
- Are comparable properties within the area increasing in value?
- How stable are current real estate conditions in the subject property market?
- Where is the property located?
- How is the urban development?
- Is your house in a flood zone?
- Are the utilities gas or electric?
- What is the property’s zoning classification?
- How are the home’s water and sewer connected?
3. Home improvements
- How old is the home?
- How many rooms are in the house?
- Is there storage, a finished basement, or an attic?
- Is there a garage?
☛ Wrap Up
Appraisers want to ensure they can determine a fair price for an investment property. They also want to prevent the lender from lending out more money than what the property is worth, which would only increase their investment risk. So that is why it is important to know which home improvements you can do that will add the most value. That’s why it is important to take all the steps you can to ensure you are getting the highest appraisal.
If you are interested in building your portfolio, we can help. We offer a variety of investor programs that will fit your current strategy. Let’s connect so we can discuss developing a good plan of action for the next year. If you need a loan now, just click on the button below for the application.
Maximilian D. Lucena
DIRECTOR OF ACQUISITIONS & CAPITAL FUNDING
Office: 904-876-3080, Ext 5
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