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The 411 on Investment Real Estate Property Appraisals: 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. 

Mastering Real Estate Appraisals: A Comprehensive Guide for Investment Property Evaluation

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

In most cases, traditional lenders always request appraisals for any type of real estate loan. In recent years, as it becomes 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 becomes a common practice for private lenders to operate like traditional lenders. So, for that reason, 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 busier markets, appraisers are 20-45 days behind. It all depends on how inundated the subject property area is at the time of the appraisal. 
  • Unfortunately, neither the lender nor the borrower is able to speed up the process.  Nor can they influence the appraisal process.

Here are a few of the most popular appraisals by property types:

  • Refinance
  • Refinance/Cash Out
  • Rental Loans for SFH Portfolios, Multifamily and Commercial Properties
  • Purchase (Single Property or Portfolio Buyout)

☛ “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. 
  • To qualify for this benefit lenders will look for positive experience in investing (5+ years) and 5 or more properties.  Plus not having any dings on your credit (foreclosures, late payments, etc.) is the key to getting the benefits of no property appraisal request from the lender.
  • Certain renewals with the same lender like:
    • Refinance
    • Construction loan increase
    • 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 the property should be assessed against the amount of value you’ll receive in return and who you intend to sell it too. 
  • 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 strategy if you want to get more for the property.
  • Gauging the profitable improvements to focus on when selling 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 range are as follows and may vary by location:
    • 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 most favorable 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. 
  • The pictures 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.

☛ 6 Of The Most Common Areas That Should Not Be Ignored And How To Fix Them.

☛ 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

Pro Tip: Don’t rely so much on information from realtors and local experts all the time.  You need to do the homework.  When you begin as a new investor you can rely on their knowledge and that is totally understandable. As you grow and learn if you want to be successful it is imperative to make sure you become the expert in your area and property management.  If you do this…you will dominate your market.

☛ 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 Base Your Report:

Here are some examples and questions the appraiser may consider in your inspection.

NOTE: Urban Development and Local Market Can Affect Your Appraisal

☛ Case Studies: 2 Examples Of Investors That Increased The Value Of Their Properties Prior To The Appraisers Site Visit:

☛ Final Thoughts

In conclusion, understanding the ins and outs of real estate property appraisals is a critical aspect of successful real estate investing. It’s not just about knowing the value of a property, but understanding the factors that contribute to that value. By being well-versed in the appraisal process, you can make more informed decisions, negotiate better deals, and ultimately, increase your chances of success in the real estate market. Remember, every property is unique, and so is every appraisal. Stay curious, keep learning, and don’t hesitate to seek professional advice when needed. Happy investing!