Things You Should Know About Appraisals

Discussion in 'First Time Investors' started by Mary, Feb 23, 2015.

  1. Mary

    Mary Mary Hirsch (Admin)

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    This is intended as helpful introductory information for real estate investing learners. It's not a comprehensive discussion of the appraisal process.

    So you found a rehab project property, have done the work, and now it's time to sell to a Homebuyer ...

    When you are selling your investment property on the retail market – that is, to a prospective owner-occupant (or 'Homebuyer') – you’ll be negotiating the selling price before you know the appraised value (although comparables and experience will help you know what appraisal range to expect).

    Mortgage lenders will not lend more than a certain percentage of the appraised value (such as 90% Loan-to-Value). Most Homebuyers will be getting a mortgage to enable the purchase of their new home. The tricky part is that both you (the Seller) and the Homebuyer need the appraised value to come in at or above the agreed selling price. The actual selling price doesn't matter to the mortgage lender, only the appraised value.

    So, you can't close the sale unless the appraisal assigns a high enough value to 'qualify' the mortgage amount needed by the Homebuyer.

    Although the appraisal is paid for by the Homebuyer, it is the mortgage lender that receives the appraisal report and uses the appraised value as assurance that the property is worth as much or more than the mortgage loan, in case the Homebuyer defaults. You, the Seller, do not get to see the appraisal report.

    Is there anything you can do to help influence a favorable appraisal?

    A good appraiser is on nobody's side. Ethical appraisers should make no attempt to help either the Buyer or the Seller, nor do they know the negotiated selling price, or what financing is planned.

    Experienced Sellers may require the appraiser to contact them first for access to the property. It's the Seller's chance to meet the appraiser at the property and share some basic information, as a one-page written list of favorable property attributes. The Seller can also hand over a page of helpful comparables. Most important, though, is a short list of information that compares favorably to other properties, such as a new air conditioning system, or an historic neighborhood.

    Some appraisers find this helpful and time-saving. Others will throw the information away without looking at it. But as the Seller, this is your one and only chance to have any influence over the appraised value.

    The appraiser’s report to the mortgage lender is their opinion of the fair value of the property, based on their own assessment of comparables and their property visit. It is important to note that appraisers are not home inspectors or contractors, although they should certainly be generally knowledgeable to property condition. Appraisers do consider the neighborhood along with the comparables, but usually only in a general overview fashion.

    How does the appraised value affect the sale?

    As an example, let’s say you (the Seller) and the Homebuyer agree on a $100,000 sale price. The Homebuyer wants to put 10% down and finance the remaining $90,000 with a mortgage - a typical finance arrangement for purchasing a home.

    As is frequently the case with standard mortgage loans, the Lender will provide a mortgage for up to 90% of the appraised value, and require the Homebuyer to make a down payment of at least 10% of the purchase price. This is the Loan-to-Value or LTV.

    So, to make the deal work, the appraised value must come in at least as much as the agreed sale price, so that the Lender will lend the $90,000 left after the Homebuyer's down payment.

    But what if the appraised value comes in at only $95,000? Now the Lender will do a mortgage for a maximum of only $85,500, equal to 90% of the appraised value.

    Now what? To complete the sale at the agreed price of $100,000, now the Homebuyer must come up with a total $14,500 down payment, to close the gap between the $85,500 mortgage and the $100,000 selling price.

    A Homebuyer is free to buy the property at any value agreed with the Seller that Homebuyer can afford, even above the appraised value. The Lender just won't provide a mortgage for over 90% of the appraised value, under this Lender's typical mortgage terms.

    The Homebuyer may find different mortgages available for various LTV terms, based on a range of factors from Homebuyer qualifications, property qualifications, interest rates, and so on. A 10% LTV is a common term for 30-year fixed-rate mortgages.)​

    In this hypothetical example, the appraisal value coming in lower than the agreed selling price has sent everyone back to the negotiating table, because the Homebuyer doesn't have enough money for the increased down payment. What happens now?
    • The Homebuyer can back out of the purchase due to their inability to obtain the necessary financing. A clause in the purchase contract permits this.
    • Or, as the Seller, you can try to re-negotiate new terms (even selling price) that this Homebuyer can afford.
    • It can be expensive to try another lender with another appraisal, as the Homebuyer will have to pay for an additional appraisal and other lender processing costs. And what if the results are the same, or worse?
    • Or you can let this Homebuyer swim away and relist the property, hoping for better luck with the next appraiser.

    Clearly, as a real estate investor, when your property is ready for the Homebuyer retail market, you need to have a reasonable expectation of the range of the likely appraisal value.

    Do what you can to help the appraiser by providing comparables, and make a good estimate of the eventual appraisal value part of your financial plan for the sale of your investment property.

    If you've sold investment property in the Brazos Valley, what have you done to try to help the appraisal value come in as favorably as possible?

    Just below is the box “Write Your Reply”. Type in your answer and then click “Post Reply” to the lower right.
  2. Sophy W

    Sophy W Member

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    Can I make an improvement on an already appraised property? I am thinking of a buyer who is willing to pay full asking price, but only if I do some upgrades. Should I go ahead?

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