We always get questions about appraisals. It is very, very important, especially for a new investor. Be thankful that we are getting an appraisal on the property. This does several things for you, and I am going to explain to you why.
Number one, it is going to tell you the appraiser’s opinion of value, obviously, right? But it is going to give you the value from an expert in the field. These appraisers are experts in their field, they understand the market, they understand what and what not to do when deriving value. If you are buying from a wholesaler or a realtor, anyone like that, they are going to give you their opinion of value, and the appraiser is going to give you their opinion of value. Sometimes they are different, sometimes they are the same.
Benefit number two is you are not only getting the value from an expert but you’re getting an unbiased opinion. The appraiser is only interested in deriving the value based on a process that they have been trained to follow. Appraisers can be a valuable ally.
Number three it shows you comparable properties in the area. So, you can look at those houses and say, “Okay, what do these finishes look like? What kind of flooring? What kind of counter tops?” All those sorts of things. What kind of appliance packages? These are very, very important, especially if you are doing a flip. It is important for you to realize what the market expects.
The fourth benefit, and probably the most important thing about an appraisal, and we have run into this on multiple occasions over the years is an accurate square footage. We did a loan for an investor who was purchasing a property in the suburbs, it was a large flip. The house was disclosed at having 5,000 square feet however the sellers and the appraisal district had the square footage incorrect. The contract was already in place however after receiving the appraisal we realized the square footage that was being disclosed was actually 500 square feet less. So what does that do to you as an investor? Well, this particular property was going to sell for about a hundred dollars a foot. Do the math… a hundred dollars times 500 square feet is $50,000. That is a lot of money. Getting an appraisal allowed the investor to get the price lowered $50,000. That could be a make or break deal! So, getting accurate square footage is huge, because a lot of times the sellers could be incorrect and this could be the same for the County Appraisal District. So, it is very, very important to have somebody come out there and actually measure it. It is a huge, huge deal.
The fifth and final benefit, it gives you a lot of information about the neighborhood. A lot of people do not even look at the appraisal. When someone sends me an appraisal, I go through everything. There is so much information in there, but one of the most important pieces of information besides the square footage and the comparables is information about the neighborhood. What are the days on market in that neighborhood? How many foreclosures that neighborhood has had recently? Information about the school district. You know, all those things are in the appraisal provided by an expert appraiser. This is very, very important, lots of great information in there. So, getting an appraisal is very important, especially if you are new into this business, and especially if you’re flipping.
Check out our video below for more information on appraisals!