Last week, we talked about right terms of sale for your property and how good real estate comps are key in making that happen. Today I wanted to end with the importance of a solid appraiser. An appraiser’s job is to offer an unbiased third party opinion of market value based on all of the data available. They can be a very useful tool in helping investors plan out their rehab projects provided that the investor is willing to do the job right. Regardless of whether or not you are required by your lender to have an appraisal completed when you purchase your rehab property, it is always a very good idea to go ahead and have one done.
What you want to have done is referred to as a “subject-to” appraisal. This means that you provide the appraiser with a copy of your rehab budget and plans and ask him to appraise the property “subject-to” this work being completed. He will also need to make note of the fact that you are purchasing the property below market value in his report. Do not, for any reason, tell the appraiser what value to appraise the property at. This is illegal and is considered to be real estate fraud.
Once you’ve used InvestorComps account to find comparables that would be most similar to your property after the work is done, it time to get your appraisal, and provide the appraiser with that data.
I feel it’s a good idea to have a “subject-to” appraisal completed when you purchase your rehab property. Why? I’m glad you asked. First of all, it gives you an official document showing the current market value of your property and second it will make the financing process when you refinance or sale your properties go much smoother. Remember that lenders and underwriters feel that if something is not documented it does not exist. Without the “subject-to” appraisal, the only document that an underwriter would have to establish fair market value when you purchased your rehab property would be the HUD-1 statement. Without any indication of a distressed or below market sale, the underwriter will assume that the sales price on the original HUD-1 was the market value when you purchased the property.
In most major cities, an appraisal for an investment property will run you about $400, so to do the “subject-to” appraisal means adding about that much to your purchase/acquisition costs. For those who say that is too much extra money to spend, you have to ask yourself one question. Would you rather lose $400 now or potentially tens of thousands of dollars later? I trust that you will make the wise choice!
All the best,