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How Do Appraisals Work For Investment Properties?

How Do Appraisals Work For Investment Properties?

Whether you want to purchase a new property or pull equity out of your investment property, understanding the appraisal process is super important to your investment journey.  Below, we will explain the common reason for ordering a home appraisal for your investment process and how an appraisal works. In general, an appraisal is a way to have a third party come up with a fair market value of the home; mortgage lenders mostly use this to ensure they are not over-lending funds.   

1. New Home Purchase Appraisal: Any time you are purchasing a property with a bank loan, the bank will require a property appraisal to be ordered; this is to make sure they do not lend out more money for the home than what they can recoup if they have to foreclose on the house. 

Here are a few tips for buying your investment property: Your lender will try to get you to order your appraisal as soon as possible. However, you want to wait until after the attorney review to order as if you already spent money to order your appraisal; the seller has the upper hand when negotiating repairs or credits for repairs during attorney review. The seller’s Real Estate agents should bring a comparable property list to the appraisal to give to the appraiser so they can get the best appraisal value for their seller. If the appraisal comes in low, you may be able to work with the seller to negotiate the home's price down. 

However, if it comes in high, you will have more equity built into the purchase and do not have to share with the seller. One thing to remember is that the appraiser will have the purchase price, and many appraisers will match their comparable properties to the price on the contract as an easy way to get the job done with less work.  If you get a low appraisal that prevents you from getting a loan, you can ask the home appraisers to review the comparable properties that you find.  Your lender can also request a new appraisal if the value of a property after you ask for a review from the appraiser's company, is still out of line with what you believe is the actual home's value. Since COVID, some banks will allow the appraiser to do desktop Appraisals for a new purchase or refinance; when this happens, they don't go to the property, so make sure you express to them any unique home qualities that can affect the property's value.

2. Remove PMI: If you bought your home with less than 20% down, you probably have been paying PMI; once you make repairs to raise the home value or if enough time has passed to increase the equity in your home, you can have your mortgage servicer order an appraisal or a Broker’s price opinion to reevaluate the value of the property.   When you order these, the appraiser won’t have a contract to compare to, so you’ll want to help their entire process by doing homework.  One has a report for any improvements that you made to the property from the time you bought it, show them receipts for any work done, or give them a list of all upgrades to the home you made that you think will raise the property value of the house.  And lastly, if you have access to comparable properties that sold for a high amount within a mile of your property in the last 6 months, bring that list to hand to the appraiser as well.

3. Getting a line of home equity credit or doing a cash-out refinance to BRRR your property: Once you force appreciation into your investment property and are ready to buy another property, one of the most common ways to do so is to do a refi or home equity line of credit. To do this, the first step is for your mortgage company will order an appraisal. For this type of appraisal, you want to have the same information you had to remove PMI ready to go.  Once the bank gets the appraisal report, they can issue you your cash-out refinance or home equity line of credit.  

Best Practices That Can Help You Get A Higher Appraisal Value?

The goal is to get your building to appraise for as high as possible. Here are some action plans to help force appreciation.

  1. Get rents up. The higher your rent is, especially if you have a property over four units, the higher your appraised value will be, since they will perform commercial appraisals.

  2. Get cap x work done. If you have plans for any cap x work, it's a good idea to get it done before ordering an appraisal. The newer your roof, HVAC systems, electric, and plumbing are, the higher your home value will be. 

  3. Could you clean up where you can? This is a big show, so at the end of the day, ensure any trash around the home is cleaned up, and the building presents nicely to avoid negative feedback from the appraiser.

  4. Have the relevant information printed out to make the appraiser's job as easy as possible. We all want our work to be as easy as possible, and if you take the time to dig for comparable properties, you can find the best fit, whereas the appraiser may not take the time you would to find good comparable properties.

How Does An Appraiser Come Up With A Price?

In Illinois, appraisers are licensed by IDFPR per federal regulations and register their appraisal company with HUD.  When a bank orders an appraisal an appraiser is assigned by Hud.  They will go out to your property and measure the square footage, take note of the number of bedrooms, the home's condition, rent prices, and compare those details to other properties with in 1 mile of the subject property that has had a sale transactions in the last 6 months. The will look for recent sales of similar properties but if they can't find them they will make adjustments using the sales comparison approach. Once they have the data collected they will give an opinion of value to the bank.