We all know the valuation of any kind is a subjective process. An object is only worth what someone will pay for it. In real estate the valuation process has evolved to the point where we have developed sets of criteria to help determine the value of real property. This process is so complicated an entire career fieldÂ requiringÂ licensed â€œappraisersâ€ has emerged just to handle the task. Â Despite appraising being a highly specialized field, almost every investor Iâ€™ve metÂ believesÂ they can tell what a property is worth just by knowing its location, number of beds & baths, and total square footage. If itâ€™s that easy to value a property, why do we need appraisers?
The answer is validation. We need an aÂ neutralÂ third-party to validate the propertyâ€™s worth. Â For my cash buyers, the acquisition doesnâ€™t require an appraisal, but the back-end buyer will need one for underwriting. Â For myÂ hard moneyÂ investors, the property will be subject to at least two appraisals. Their lender will require an appraisal for theÂ acquisition of the investment property. This is done to substantiate the after repair value and validate the loan. Â And after the property is renovated, the back-end buyer will also need anÂ appraisalÂ for underwriting.
The process seems logical, and as long as everyone is in agreement on the propertyâ€™s value there is no issue with the transaction. Â The problem comes when thereâ€™s aÂ discrepancyÂ in what the buyer thinks the property is worth (or will be worth) and what the lender feels itâ€™s worth. Â For the investor this can mean a few different things: 1)Â They will likely need to bring more money to the table at closing, since the lender wonâ€™t lend on theÂ anticipatedÂ amount. 2) They may want to change from a buy-fix-sell strategy to a buy-fix-rent strategy. 3)Â The deal may not be as good as the investorÂ originallyÂ thought. Ultimately it means the investor is at the mercy of the lender. Â
So why would the appraiser come up with a lesser value, if your property has good comps supporting a higher price? Here are a few reasons: Your lender is in the business of protecting their investment. In this case, their investment is your loan. Often, hard money lenders lower ARVs as an additional measure to safeguard themselves against potential default and foreclosure. Â Yep, even if your comps are showing $120K for recent rehabs in the same area, a lender may choose to run their appraisal on the conservative end at $115K or even $110K just to protect their investment. Â
Another very important reason has to do with the rapidly changing housing market. Â Many economists and real estate experts believe we have hit rock bottom and are on the way back up. Â First quarter data shows both housing prices and sales are up across the country, but they are also showing itâ€™s very segmented by market, and even micro-market. Certain neighborhoods are not reflecting the across-the-board price increases, and itâ€™s challenging for appraisers to stay on top of the segmentation. According to a recent article in theÂ Sacramento Business Journal,Â Â in some cases, reliable comparable sales are few, so appraisers are asking real estate agents to fill them in on the number and dollar figures, or they are having to use older comps. Sometimes appraisers may even have to factor in the value of similar properties in similar neighborhoods. Itâ€™s likely as more traditional sales are made, the appraisal process will become easier and more accurate. Â This translates to better, more accurate ARVs forÂ real estate investors.
The important thing to remember is appraisals are subjective, and if you are using a lender, you are subject to their appraisal. Â So, run your calculations conservatively. Â If the numbers work out, even in the worst case scenario, then you are buying a good deal. Â
Seth TeelÂ is a licensed agent forÂ New Western Acquisitions. IÂ specialize inÂ investment property, REOs, foreclosures, sales, acquisitions, rentals, auctions, estate sales, and all types of real estate investment. Call:Â 210-628-9373Â or Email:Â InvestSATX@gmail.com