Key Component in Property Investing
Most property investors tend to think they have a good idea of the value of a potential house, but appraising is one of the key components in the investment process.
Recent mortgage industry failures notwithstanding, appraisers act as part of a rather complex “safety net” built into the real estate, mortgage and banking industries. It’s a safety net that has become extremely tight in recent years…In an effort to protect buyer, seller and lender alike, appraisers are very strictly regulated by state and federal guidelines.
An appraisal is ordered perfunctorily as part of the mortgage loan process on most houses. When a lender orders an appraisal for a house buyer, the lender simply requires a totally impartial expert opinion as to the fair market value of the property they’re going to offer you, the investor, a loan on.
The key words here are “impartial” and “expert.” Common sense dictates that lenders base their loans on valuation information that comes from someone who has no stake in the real estate transaction.
The formal appraisal that is generated by a licensed appraiser is a valuation estimate of a property – basically, a reasonable expectation of what price the typical buyer would be willing to pay for the property in its current state, under fair market conditions.
Appraising involves not only inspecting a property, but analyzing the community where that house is located as well. The appraiser will gather information about any given neighborhood, and will note in his appraisal report items such as the general conditions in the area, overall market stability, as well as what range of prices there are within that community.
When it comes time to go out and inspect a particular house (known as the subject” property), the appraiser will first measure the house to determine its gross living area. He’ll also check on room counts, layout and overall condition of the house. (If you’re the house seller, it’s helpful to point out any renovations you’ve made to the house recently.)
After the inspection…
After the completion of the inspection, the appraiser goes to his data sources to find recent sales of similar houses nearby. Ideally, these would be a minimum of three properties as close to the subject’s size, age, lot size, location style and amenities as possible, which have passed title within the past six months.
The appraiser would then use these “comparable” properties to relate to the subject property on an item by item basis.
For any significant differences between these properties, value adjustments are made. It is in this comparison process that the artistry of the appraiser is brought out. The appraiser uses his best judgment and experience to determine what value figures to use to adjust between parcel sizes. For instance, houses with or without central air conditioning, or houses of different architectural styles or ages.
Since there is no exact equation that’s used in the appraisal process, lenders obviously place a great deal of faith in the “best judgment” an appraiser can supply.
photos courtesy of prawnik-online.eu, allocated.com, growingseattle.com
- Under Valued Appraisers (fflop.wordpress.com)