I deal with hundreds of appraisers every week, and it never fails at least twice a week I hear horror stories about appraisals these investors have received on their properties. So, today I would like to share some tips on how to “help” your local appraiser along.
But first, does this story sound all too familiar?
When the document arrived in our inbox my husband Dave and I were giddy with excitement.
“What’s your guess?” Dave asked me curiously. “I think $297,900. What do you think?” I replied excitedly. “Well… I hope $305,000, or more, but it will probably be $299,000. Let’s see …. ”
The room fell silent as we both stared in shock at the number that was before us … appraised value of $289,000.
“Well, that’s what happens when appraisers have access to MLS and can see what you paid for a property.” I said dejectedly.
You see … these investors are very confident that the house they paid $289,000 for is actually worth over $300,000 … and in fact when they do a few repairs and give it a little cleaning the value would be more like $310,000. They even ran an electronic property valuation and that report valued their place at $321,000.
Their property has an ocean view, alot of character, and is in a neighborhood with little turnover within the last six months. So it wasn’t an easy job for the appraiser … but as they looked through the appraisal report they found issue after issue.
I suggested they send the appraiser some comparables she should have used, challenge the market rent rate she came up with, and the replacement cost numbers she used. Basically, the appraiser had to redo her report because the first one not only gave them a much lower than market assessment, but some things in the report were downright wrong!
Now let me be clear appraisers are not the enemy but appraisals are an opinion of value not a scientific fact. And the bottom line is that many appraisals default to the “safe” answer which is usually what you paid for it. Which can be a kick in the teeth if you’ve paid under market value and are trying to get a lender, a partner or a tenant-buyer to work with you at it’s accurate market value.
Here are some ideas of how to best handle the appraisal process.
Greet the appraiser with your own deal summary, including the real estate comps you found in InvestorCompsOnline that were used to complete your market valuation. You can also include the rent rates for nearby rentals that are similar to your property, and indicate any work you’ve done to improve the property to ensure that it’s all included in the valuation.
It’s okay to hand a package to the appraiser. They should do their own research, but let’s face it, they are human and if you can make it easier on them they just might take the easy route.
Now, when you’re reviewing the appraisal report, even if you’re happy with the valuation assigned to the property, take a close look at:
* The comparable properties used: No two properties are the same, but to make the valuation as accurate as possible the comparable sale dates need to be very recent, the circumstances of sale need to be similar (don’t use a foreclosure as a comparison to a market sale or a non arms length transaction as a comparison to an arms length one), and the location of the property needs to be very comparable – preferably nearby.
* Value assigned to special features: In this example, the appraiser assigned no special value for the premium street or for the ocean view. To the investor that resulted in a valuation below the market value. None of the comparable properties used in the appraisal had ocean views and there was only one property on the same street.
Whether it’s before you get the report or after the report is complete, you have every right to make sure that the valuation has been done correctly. It is an opinion, and an opinion can be changed and it certainly can be influenced. And while the banks, partners, and other parties that rely on the appraisals may not want to accept that fact, as a real estate investor it’s a reality you have to work with.
By the way, the investors in our example, they are awaiting the revised report. They aren’t expecting the value to change that much but you know they’ll be doing things a little differently from now on.
All the best,