Protecting Your Business: Appraisals & Inspections

If you have never purchased a property before, especially an investment property, you may be surprised at how quickly the extras can add up. Two of those seemingly extra costs occur before you take ownership of the property, and could go a long way in determining its value. Perhaps even more importantly, some warranted costs will determine whether or not you buy the home at all. While the inspection and the appraisal both serve to provide some idea of value, both are completely independent from one another. Before you move forward with another purchase, you should fully understand the role and function of your appraisal and inspection.

The inspection is done for your protection. Yes, it could be viewed as a terrible way to spend a few hours, but it is a critical part of the purchase. Unlike the appraisal, the inspection is contingent on you ordering it. As boring as it may be, you want your inspector to take their time and find out as many dings about the property as they can. You don’t need to be a seasoned investor to notice the main issues with a property. The inspection will give you an idea of the items that you can’t see. Everything from the foundation to the roof will be included. The report you receive should be long, and possibly even confusing, but it will give you an idea on the work needed and costs associated.

It is important that you ask your inspector as many questions as possible until you feel comfortable. Most reports will place a dollar amount to each of the items needed to be repaired, but even if they do you should get your own estimates. The inspection is just an outline of what is wrong or what will be wrong in the future. Most inspectors have a good idea of the repair costs, but they are not contractors. You should take the information on the inspection and run it by your contractor. If the costs or fixes are more than you originally thought, the inspection can provide you with an out on the contract. The bottom line is that the inspection protects you from buying a lemon. If you omit this step, you never know what you can end up with.

If you are receiving lender financing, you will have to get an appraisal on your property. The appraisal is an estimate of the value, as determined by an appraiser. It is an estimate because real value is ultimately what someone decides to pay for it. There may be differing opinions when it comes down to it. The appraisal will look at comparable sales of similar size, style, condition and bedroom count to come up with a value. Where some appraisals fail is that it is difficult to find like-sales in an immediate area. The further you go away from the subject property, the less accurate the value really is. In some areas, there may not have been a sale in the past few months, or the closest one is over a few miles away. The appraisal value should not be treated as an absolute, but an estimation based on the current information the appraiser has available.

While the amount may just be an estimate, it is what your lender will use for their value. The appraisal process for lenders has changed quite a bit from years past. Presently, your lender will place the order to a third party who will then assign the order to a local appraisal company. This was done to eliminate lenders having influence over the appraiser and giving a much more accurate estimate of value. Unfortunately, not every appraiser has a good grasp of the market the property is located in. Many values have come in below the sales price. In this scenario, you, the buyer, would have to bring the difference to the closing if you want to proceed. The alternative is to pay for another appraisal in the hopes that the value is more in line with the sales price. The appraisal process isn’t perfect, but it is a critical step if you are getting any type of lender financing.

Most inspections for single-family properties can run anywhere from $350 to $650. Appraisal costs can be roughly in the same range with the costs higher for multifamily properties. With these two costs alone, you are around $1,000 before you pull title or even receive an approval for your loan. While this can certainly be costly, the alternative is to waive the inspection and to take your chances with the property. Even the best investors will overlook some items, leaving them with far more problems than spending $1,000. If there are foundation issues, the bill can be in the tens of thousands. If you are buying real estate, you need the protection that the inspection gives you. You may buy ten properties with no need for an inspection, but all it takes is one to negatively impact your business.

As an investor, you always want to be as protected as you can be. The inspection and, to some degree, the appraisal will afford you that protection. Treat each property the same. Never assume your property doesn’t need an inspection. The minute you do, you will find yourself in trouble.