How to Appraise Real Estate for Refinancing Your Mortgage?
You might not have realized it, but you must go through the home appraisal process during the mortgage refinancing process. While your credit score and financial situation do affect your refinancing, your bank wants to know your home’s situation, too.
A positive review can help you obtain a mortgage with a lower interest rate plus a reduced monthly payment. Your lender wants to know that they are not giving a loan for more than the home’s value, so they send an appraiser to assess the property’s value. An appraisal that is too low can cause you to get turned down for refinancing since the bank sees it as you not having enough equity to refinance.
You need to present your home in the best light possible for this appraisal. You might think they would use the appraisal from when you purchased the home, but they need an updated appraisal to ensure you have taken good care of the home since then. They look at the same items an appraiser would at any other point in the purchase or sale process, including:
- The property’s square footage
- The number of bedrooms
- The current home condition of the house
What That Means In Regard to Changes Made
That means that the addition you built increases the value of the appraisal.
The landscaping added does as well. If you updated the bathrooms or kitchen since purchasing the home, this typically results in an improved appraisal. If you need to make quick changes to spruce the place up, you can do so by replacing the sinks and fixtures. Put in new appliances, countertops, and backsplash. Replace the flooring.
You can do simple things like clean the yard, plant shrubs, clean the exterior by power washing, replace roof shingles, repair broken or loose shutters, and plant flower beds to increase the home’s value.
While it does not make any list of formal criteria, appraisers like to see a decluttered home. A clean, organized home can result in an appraisal of 10 percent higher than an unclean home.
Check the outlets, wall switches, ceiling fan pull cords, etc. so they all work. Check the walls for cracks and putty and paint over them.
While you get no say in choosing the appraiser, you can request the bank use a local appraiser. Typically, an appraiser unfamiliar with an area will appraise it lower. Those from the same area, especially the same 10- to 15-mile radius, will appraise accurately or a little higher.
Visit your newer neighbors. Those that purchased their home in the past three to six months can provide you with an important comparison. Their homes are the ones the appraiser will compare your home to determine value.
Taking these steps before the actual appraisal can help you obtain a higher valuation for your home. You can conduct your own self-appraisal first, then make the recommended repairs and updates to raise the value of your home.
What if you want to refinance your rental property? That requires a little bit different of an approach. You probably don't want to have to take the many courses required to become a real estate investor simply to know whether you would obtain a really good deal. You do need to be able to spot properties with a positive investment return potential. Cost and value top the list of important factors to consider.
Refinancing without an Appraisal
Even though an appraisal is a requirement in most cases when you want to refinance your mortgage, there are refinance options that are exceptions to this rule.
Here are some you can consider:
These no appraisal refinance possibilities are not available to everyone, so make sure you check with your lender if you qualify for any of these options. And if you do, congratulations! Now you can change interest rate or structure of your loan, and your loan term. However, if you want to change the loan type, or cash-out refinance, you will have to do a home appraisal.
How to Appraise Real Estate: Rental Properties as Passive Income
While real estate such as rental property does not qualify as truly passive income, it can come close. Typically, when you lease a home or apartment to an individual, they clean it on a regular basis leaving you in charge only of the major repairs. They change the light bulbs when they burn out, but you repair the HVAC if it breaks down. Rent provides a dependable revenue source, while leaving you to do other things.
You need to determine three components when deciding whether to purchase a property:
Cost,
Return on investment (ROI),
Value
It takes a lot of work to deep dive into the cost, ROI, and value of a single property. You need to know how to appraise a property like a professional appraiser would plus you need to know how to approach the fiscal aspects of the property. This article examines the activities of an appraiser as well as four common property value models:
sales comparison approach,
capital asset pricing model,
income approach,
cost approach.
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How to Appraise Real Estate: Appraisals Defined
An appraisal determines the factual, unbiased fair market value estimate of a property. Licensed and certified appraisers conduct these property examinations to determine value. The appraisal looks at the sales information for similar properties that recently sold in the same neighborhood, current property condition, and the property’s location. As an investor, you need to analyze these properties before you purchase to make an informed decision. Your mortgage lender will require an appraisal as a part of the mortgage process, but to determine which property to purchase, you need to objectively assess the property’s market value.
How to Appraise Real Estate: The Process of Elimination
If you spotted a number of properties that provide potential at face value, you need to consider their value in-depth. Perhaps you see twenty properties you would consider at first blush. Using an online valuation calculator such as the one at HouseValues.com you can determine a quick and dirty value. You enter the property’s street address and obtain its current value.
This process lets you quickly determine which properties cost what you have budgeted for a purchase. You probably obtained pre-mortgage approval and know how much money a bank will loan you for a property. This process helps you whittle down the choices to a manageable number for in-depth research.
How to Appraise Real Estate: The Job of the Appraiser
You have two choices on property appraisal at this early stage. You can hire an appraiser to examine each property or you can take the checklist of things they would look at to apply it yourself. The latter costs a bit less, but you must take your own time to look at each property in detail. Hiring an appraiser avails you of their training and experience.
While you would examine the entire property, the appraisers only look at the condition of the permanent main structure.
They appraise a home, not its addition or detached workshop. The appraiser examines the structure’s physical characteristics and observable condition, including its:
age
number of bedrooms
number of baths
square footage
lot size
location
view
An appraiser notes items like cracks in the plaster, leaky faucets, broken windows, cracked ceilings, walls with water-stains, pests, lingering odors, and soiled carpets. This position also examines the curb appeal of the property. An overgrown yard or a broken garage door results in a lower appraisal. Homes and office buildings in desirable neighborhoods appraise at a higher value than those in declining neighborhoods.
Appraisers determine value using increments of $500. An unmade simple repair can cost a seller on home value, but making the repair could add to the home value. Those small things like a washer for each faucet so there is no drip and replacing broken glass can quickly increase your home or office value. Conversely, if you self-appraise a property before having an official one conducted, just to eliminate the properties that would not make viable investments, you need to know precisely what the pro appraiser would look at to create an honest value estimate.
If you want to sell your house and need to figure out what improvements to make to quickly raise its value, you need to know the same list of items. In these cases, you need to itemize your improvements. Record the repair details, the date they were made, the amount spent. Keep a copy of the receipt. This lets you easily appraise the appraiser of items they may not notice at first glance, such as new insulation or a new roof. Update carpet, permanent fixtures, windows, and tile up-to-date.
Of course, that only represents the appraised value of the home. You need to determine its value in regard to its cost. You also need to project your ROI. Below are the various real estate valuation approaches:
Sales Comparison Approach
When valuing residential real estate, the sales comparison approach (SCA) typically gets used. Real estate agents and appraisers use this property evaluation method. This quick method provides a relative price value by comparing homes of similar value which rented or sold in a given time period, usually three months. However, when in regards to an investment property, investors require an SCA that spans a longer time frame so they can spot trends.
These assessments typically consider the number of bedrooms and bathrooms, fireplaces, garage spaces, driveways, decks or patios, and any pool. It also includes the price per square foot. For example, if a 2,000-square-foot home rents for $1 per square foot, an investor could project the same rent from the property themselves.
Capital Asset Pricing Model
The capital asset pricing model (CAPM) provides a better approach for investors since it focuses on projecting ROI. This comprehensive valuation method examines risk and opportunity cost while delving into a potential return on investment (ROI) from rental income. It also creates an investment comparison that includes United States Treasury bonds or alternative forms of real estate investing like real estate investment trusts (REITs).
The CAPM examines the property location and age. Older properties require higher maintenance expenses. Properties in areas with high-crime rates require additional safety precautions. You may need to install a privacy fence or an alarm system.
Using the Income Method
This method is the favorite used in commercial real estate investing. It focuses on the rental property’s potential income by determining the property’s annual capitalization rate which equals the projected annual income (gross rent multiplier) divided by the current property value.
If you are new to investing in real estate, you might look at the reports for the net present value of money, but in real estate, it is known as discounted cash flow. This accounts for inflationary and deflationary risk.
Using the Gross Rent Multiplier Method
The gross rent multiplier (GRM) method uses the basic annual amount of rent from a rental property. This is a raw figure and does not include subtractions from utilities, taxes, insurance, or other property expenses. It uses gross rent rather than operating income. To get a clear picture of the properties and which would make the ideal investment, you need to compare the GRMs. To find this figure, divide the property’s sale price (also known as asking price) by the annual rental income. Good properties have a lower GRM than others recently sold in the neighborhood.
Using the Cost Method
The cost approach combines the depreciated value of improvements and the land’s value. You will most frequently see this method applied to valuing vacant land. It bases value on the best use. That can vary widely from developing apartments or an office complex to drilling for oil. In some cases, this depends on property zoning. You could apply for re-zoning once you purchase the property, but the process is costly, time-consuming and you may not obtain re-zoning approval.
Combining Approaches for Valuation
Like studying any investment before purchasing, this type requires close study and due research. Since you are making the decision to pursue an investment, you need to use multiple valuation methods. For residential property, you would use all of the methods except the one for commercial real estate and the one for land by itself. Using this combination of methods plus your self-appraisal of each property you determine worthy of further investigation, you can quickly determine which properties offer the best investment.
Ten Facts About Commercial Real Estate Appraisals
When first learning how to appraise real estate, you will probably notice a vast difference between residential and commercial real estate. There are ten quick facts you need to know that create that void and only apply to a commercial real estate appraisal.
1. The physical site inspection comprises one small part of the appraisal process which also includes research into the public records for prior owners, zoning records, an investigation into the demographic makeup and the typical lifestyle of the neighborhood’s residents, comparable sales records, replacement cost data, and rental comparisons. They bundle this information into a report on the property’s value. The process requires several days to multiple weeks.
2. If you are the seller, speak honestly about the property. Anything you say they can verify with other sources. Some appraisers will ask questions they already know the answer to in order to appraise your credibility.
3. Along with remaining honest at all times, share all information upfront. The appraiser will catch you if you try to withhold information. They will typically request a property tax bill, a property drawing set, income statements, etc. Offering everything at the outset can save you time and mean that you do not need to dispute the appraiser’s valuation.
4. You cannot get an appraiser to cut short their process nor can you interfere in it. They have a strict code of ethics to which they must adhere as well as a process that is codified in the Uniform Standards of Professional Appraisal Practice. The Uniform Standards specifically require them to “provide an unbiased opinion.” The appraiser will not violate these, lest they suffer disciplinary action and revocation of their certification or license.
5. Appraisers maintain strict client confidentiality. The client refers to the individual who orders the appraisal. This could be a bank, an independent mortgage lender, the seller, or the buyer. No other party gets to see the appraisal.
6. If you do want the appraisal shared with others, you must identify them to the appraiser and provide permission to release the report. Examples include the seller if you are a buyer or the local property tax appeal board.
7. In commercial real estate, there are three report types – restricted use, summary, and self-contained. Restricted use reports provide a short, inexpensive report for client use only that costs between $2000 to $2,500. Summary reports summarize data and provide some analysis. The client and others can use this report type that costs about $3,000. Self-contained reports contain minute details, data and extensive analysis. These are rarely requested and cost more than the other types – well above $3,000.
8. While the report length differs between the report types, the scope of work to create the report does not. For that reason, little difference exists between costs. The appraiser will retain their work file which contains all source information.
9. Establishing the valuation date proves the key to the property value. Appraisers provide three types of dating methods – appraisal on date of inspection, retrospective appraisal which uses a past date, prospective appraisal which uses a future date.
10. Some appraisals depend on property interest. You need to tell the appraiser why you want to appraise the property. If you need the fee simple interest, you want the value of the property and the building. If you request a leased fee interest, you need to know the property value of a rental property when fully occupied by tenants. You ask from the perspective of the landlord. If you want to know the tenant’s perspective and for what rent they would likely sign a lease, you request a leasehold interest.
How to Appraise Real Estate: In Conclusion
Valuing property is no small task. You have many steps to determine which properties you observe really offer the appropriate value for investment, a reasonable cost, and adequate return on investment. When you have numerous properties to consider, you can use these appraisal methods as a way to determine which properties to invest the money in for obtaining a formal appraisal. Before you go searching for "appraisers in my area," do some of the early research yourself. You can save yourself a lot of money just by reducing the number of properties for which you want a formal appraisal.
Those few formal appraisals will easily help you decide which property offers the best investment. They each cost between $2,000 to $4,000 though. That may seem small when you plan to purchase a property for hundreds of thousands or millions of dollars, but for most people, every savings on a real estate purchase helps. Using this combination of appraisal techniques can help you reduce the list of potential investments to a reasonable number.
Applying these methods can also help you boost the appraisal value of home since you know what an appraiser will look for when visiting your home to inspect it. You can improve the value of your home before an appraiser visits. That will result in a higher valuation for your home which leads to a higher asking price for you.