Why You Need A Home Appraisal For Your Investment Property

Key Takeaways

  • A home appraisal uses comparable properties to help determine the value of a given property.
  • Getting a home appraisal for investment property purposes is not uncommon. In fact, investors should seek out appraisals as much as possible.
  • There are steps investors can take in light of a low home appraisal.

You would be hard-pressed to find a real estate investor who does not know what a home appraisal is; however, it is unfortunately very common for investors to misunderstand why they are so important. Appraisals can come in handy for investors looking to buy, sell or even gain a better understanding of how much a property value has changed over a given period of time. Keep reading to learn more about home appraisals, and why you should care about them.

Do I Need To Appraise My Investment Property?

If you find yourself asking whether or not to get a property appraisal, the short answer is yes. Every investor should appraise his or her property to get the biggest bang for their buck. Appraisals allow investors and lenders alike to gain a better understanding of how much a property is worth, and can help determine the potential return on a given investment property. There are a number of approaches for appraising a property, but in general they will provide a better idea of how much the property is worth.

You may think that appraisals are only completed while evaluating a potential deal, but that is not always the case. Investors should seek to appraise existing investment properties for a number of reasons, one of which is because a home appraisal can give investors an idea of how much a property has appreciated. Because of this, it is a good idea to request a home appraisal every few years.

Appraisals can also help determine the amount of depreciation on a given property. While this may not be what you want to hear, a lower home appraisal estimate could potentially save you money in the future. For example, you can ensure that you aren’t paying too high of taxes due to a previously high property value. When it comes to real estate investing tax strategies, home appraisals have the potential to save you money. By keeping up with the current value of your investment property, you can help eliminate extra expenses and ensure you’re keeping more of your profits.

For those wondering about the home appraisal cost, it will depend entirely on your area and where you are at with a given property. Home appraisals are paid for by the buyer during closing, and usually cost a few hundred dollars. An investment property appraisal can cost more, but also includes additional information and can take more time. Investors should research the average cost in their local area for a better idea of what to expect.


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home appraisal process

Home Appraisal Process

Conducting a home appraisal is not as complicated as it may seem. There may not be a tried and true home appraisal calculator, but there is a basic process you can typically count on. Here is a basic home appraisal checklist to help you understand what to expect during the process:

  1. Bank Order: Typically the bank where you are getting your loan will start the appraisal process with an order. It is important to note that the lender or bank does not have a say in who the appraiser will be and cannot contact them until the process is over. This regulation was put into place to ensure the process remained free from outside influence.

  2. Property Evaluation: After a financial institution has ordered the appraisal of a given property, the actual process will start with a home tour, not unlike with a home inspection. The appraiser will survey the entire property and make note of the condition of the home and surrounding neighborhood.

  3. Comparable Properties: Once the appraiser has toured the home, they will then pull data from the MLS and public records on comparable properties in the area. Appraisers will look for information on what similar homes have sold for and use it to help determine the value of the property. There are several factors appraisers will look for when comparing properties such as location, interior upgrades, proximity to services, curb appeal and property size.

  4. Appraisal Report: The final step in the process is typically when the appraisal report is issued. It will feature information on why the property was valued at a given price, and which properties were used as comparable properties. The report should also contain a description of the property at hand and some information on the real estate market in the area.

These steps should be used as a general outline when preparing for the home appraisal process. While they do provide a good basis on what to expect, appraisals can vary depending on the situation at hand. Appraisers may consider different information or use different approaches. As a real estate investor, it is a good idea to familiarize yourself with the different factors taken into consideration and when they are best used.

Sales Comparison

The sales comparison approach refers to comparing similar homes that have sold or rented within a given area. This approach is valuable to investors looking to predict emerging market trends in their area, or to get a better idea of the properties in general. This is often the most common appraisal process used when looking at property value because of its clear cut guidelines and overall consistency.

It is important to keep in mind that this approach does provide broader estimates when compared to individual appraisals. Sales comparison appraisals fail to account for unique features in a given property, and can be thought of more as general guidelines for a given area. This form of property evaluation is best suited for investors seeking a base opinion for how much a property is worth.

Income

The income approach to appraisals is often most helpful for commercial real estate investors, as it gives a clear idea of the potential profit margin when considering a given property. This method will look at the potential income for a property relative to the initial investment cost. Because the income approach compares the two costs, it can be helpful when considering whether or not to invest.

It works by first determining the capitalization rate, which is pulled from looking at the projected annual income divided by the current value of a property. For example, if a retail space costs $100,000 to purchase and the expected monthly rental income is $5,000, the annual capitalization rate will look something like this:

30,000 ($2,500 x 12 months) ÷ $100,000 = .3 or 30 percent

The above is a simplified example of the income approach valuation formula, and does not consider interest rates or appreciation/depreciation over time. However, it does provide a good outline of the types of figures you can expect from the income approach. Investors should make use of this model when considering the potential income of a property in comparison to the initial investment.

Cost

Using this approach, appraisers will combine the value of the land and the depreciated value of any improvements. This approach follows the rule that a property is only going to be worth what it can be used for. Appraisers will often consider the best use of the land, relying on area information to determine what the space would be best used for.

The cost approach is most commonly incorporated by investors seeking to buy vacant land because it reviews existing market factors to determine how a property could best be used. For example, if you are considering buying land in the middle of a commercial real estate area, the land is unlikely to make a good space for building a house. The cost approach will consider property zoning to determine whether or not your plan for the area will result in a successful business investment.

home appraisal estimate

How To Dispute A Low Home Appraisal (And Receive A Higher Valuation)

While home appraisals can be extremely helpful in understanding the value of a property, in some cases they can miss the mark. Appraisers are often reliable, however, there may be instances where you run into an appraisal that you feel is too low or inaccurate. In those cases, these are the best home appraisal tips I have found to be most helpful:

  • One thing you can do before your property is even appraised is to ask if the appraiser is local. As a real estate investor, you already know the importance of having a strong local understanding, and finding an appraiser is no different. Those with experience in your market area may be able to provide more concrete estimates the first time around. While requesting specific appraisers is not allowed, you can try to request an appraiser from near or within your area.

  • Prepare for an appraisal as you would an open house. For real estate investors looking to appraise existing investment properties, understand that you only get one first impression with your appraiser–just as you would with potential buyers. By clearing any clutter and giving your curb appeal a boost, you can help ensure you make a good impression the first time around.

  • Understand comparable properties in your area that have recently sold. If you know of a house that recently sold for under market value due to unfortunate circumstances or a poorly designed interior, be ready with the appropriate information. When comparing the value of a home to recently sold properties, appraisers often only have access to the data available on the MLS, meaning they may be working on more limited information.

  • If you do find yourself on the receiving end of a low property appraisal, the first thing you can do after receiving a low or bad home appraisal is to write down your reasoning. It sounds simple, but it is crucial to make sure you have a sound game plan for disputing the appraisal value. Be sure to arrange your points in a logical manner, as to help guarantee you have a clear direction of what needs to be said.

  • Be specific about what needs to change. Depending on the area and type of appraisal you have received, you will get a written report along with it. If you feel your appraisal value is too low, the report is the best place to start. Research the market area and search for any small errors that may have resulted in a less than stellar appraisal value. This can be a great time to double check with an online home appraisal and tap into your own understanding of the local market.

For investors still wondering “what is a home appraisal” or “why do I need one,” think of it this way: an appraisal can give you a better idea of how much your property is worth. You can then use that information to determine the potential or existing profit margin of an investment deal. A home appraisal is a useful tool for real estate investors and should be treated as such.

What are your best tips on preparing for a home appraisal? Share in the comments below to help out your fellow investors.

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Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies