The Appraisal

What is an Appraisal?

An appraisal is a formal evaluation of a property by an expert who then gives the property a final value.  The appraiser will first conduct a personal inspection of the property.  During this inspection the appraiser will measure the size of the home and check the number of rooms and bathrooms.  The appraiser will also look for major faults with the property such as a leaky roof, mold, or termites.  An appraisal can take anywhere from ten minutes to over an hour.  The buyer does not have to be present during the physical inspection but it is an interesting learning experience.  After the physical inspection the appraiser will review his data and compare it to county records to ensure his findings are correct.

Who?

An appraisal is a third-party expert who assesses and estimates the value of a real estate property.  For a residential property the appraiser is usually chosen by the lender but the appraiser does not work for the lender.  The appraiser works on a property by property basis and some specialize in estimating certain types of properties.  It may be wise to look into the background of an appraiser to make sure they are experienced with the particular type of property you are attempting to purchase.

Where?

The appraisal takes place at the particular property’s location.  The appraisal will inspect the outside of the property including the backyard and parking lot.  The interior is also inspected even if there are tenants currently present at the time.

When?

The appraisal takes place after the seller and the buyer have negotiated and agreed to a certain price.  This price should be looked at by your broker to make sure it is comparable to other similar properties in the area.  After the deal is agreed to the lender will order an appraisal.  The appraisal costs approximately 300-700$ and it is paid by the buyer.  This money will not be returned even if the deal falls through.

Why?

To give a value to real property.  This value is then viewed by the lender and compared to the selling price agreed to.  Many times if the appraisal price comes in lower than the selling price than the lender will not provide the loan.  In this case the lender is protecting the buyer by not letting them overpay for the property.  The buyer must either provide more money as a down payment or negotiate with the seller to lower the selling price.  The appraisal is a major step of the purchase process and often times a headache to deal with.  Be prepared to renegotiate or to front more money upfront.

The final report of the valuation of the property will show the appraiser’s reasoning behind the property’s value.  Comparable properties in the area should be noted and they should have been sold within the previous six months.  If the appraisal is not to your liking it can be appealed to have the appraiser’s work reviewed.  Oftentimes this will bring in another value for the property but it can be either higher or lower.  Always try to negotiate with the seller after the initial valuation especially if the price is lower than the price agreed to.

 

Initial Purchase (Negotiations)

My initial purchase was a series of negotiations that I truly felt would never end.  In that market, where prices increased about 10% in a single year, sellers were being flushed with offers.  I put in more than five offers on different properties and all were denied.  Again, I was mostly outbid by other large investors who came in with cash offers well over the asking price.  The offers that I put in were usually no more than 5-10k over the asking.  The reality of the market was that offers below this would definitely not be chosen.

Property Inspection

The property that I eventually chose was actually one that was recommended to me by a family member.  There were two properties next to each other that had been on the market for a rather long time.   I had disregarded the property because of its location.  I did not believe it would be a good area to invest in.  This family member who knew the area stressed that it was in a bad zip code, but in secluded area without many of the problems of the surrounding area.

I drove to the area to visit the property and the neighborhood.  Neither was particularly impressive but it did seem workable.  The worst problem with the property was the lack of a fence in the closed parking are to the back of the house.  In this area this meant that the backyard had become subject to illegal dumping.  There were mattresses, couches, and even shopping carts but problem this can easily be fixed with a fence.  The other main problem was that there was a rather messy tenant currently in one of the units.  Nevertheless the property would generate cash flow if managed properly so I put in a bid subject to interior inspection.

A week passed and the bid was accepted.  I was very surprised because sellers usually prefer to avoid FHA offers.  FHA appraisal inspections are notoriously strict and consistently headaches. While inspecting the property it was fairly evident that this tenant would most likely need to be evicted.  Not only was the apartment filthy, but to me it seemed like a public health issue.  They had two small children which they had living in unsanitary conditions.  I was open to letting them change their ways once I acquired the property but that was a long ways away.

Appraisal Results

When the appraisal results returned we received the expected news.  The bid I had put in on the house was greater than the actual value of the home.  The asking price was at 117k while the appraisal came in at 103k.  I actually believed this would be the end of the deal as the seller would be getting 14k less than originally agreed upon.  Surprisingly the seller was willing to negotiate, likely because his property had been on the market for so long.

The seller agreed to sell the property and make all of the fixes required by the FHA inspection.  FHA inspections not only focus on the price of a home but on the safety of the home for the buyer.  This is why their inspections are often more stringent.  The deal with the seller was that the property would sell at 105k and that I would cover the extra fees for both parties.   This mean that my down payment would be 3.5% of the price of the property along with an extra 2k and the fees.  I found it to be an acceptable deal especially for someone breaking into the business.

The deal was sent to the underwriter and it was another month before anything was heard.  There is a certain time limit within which the deal must be completed or the seller is able to choose another bid.  Luckily the deal closed in time and I purchased my first property.

Be Prepared

The purchase of a property is always a very stressful experience.  The best way to handle the experience is to research thorough beforehand and to have a very trusty broker.  Take a chance and enjoy the process.  It’s a once in a lifetime experience purchasing your first property.