Ever wondered how the home appraisal process works?
This discussion is for you then 🙂
Let’s dig in.
What is a home appraisal?
A home appraisal is, in essence, an “opinion of value” compiled by a professional; known as an Appraiser.
Of course, an Appraiser can compile an appraisal for more than just a residential property. However, for the purposes on this discussion, let’s narrow our focus around the home appraisal process and the important things you need to know.
Why are Home Appraisals Important?
Before we dig in too deep, let’s just start by asking ourselves why the home appraisal process even exists to begin with.
To answer this question, you just need to place yourself in the lender’s shoes for a moment. If someone wants to borrow your money to purchase a home, wouldn’t you first want to know how much the home is worth?
After all, you don’t want to lend them more than the house is worth, right?
Okay – so as the lender, how can you best determine what that particular home is worth? If all homes were exactly the same and a bunch of them sold yesterday, this would be easy.
However, homes are not the same and they tend to be in one Owner’s possession for a long period of time before selling. This naturally makes it more difficult to determine the value of a particular property and leads to the requirement for an agreed upon standard in the space.
Why are Home Appraisals Important….for Investors?
So we’ve talked about why home appraisals, in general, are important. Let’s now take a moment to consider why you, as an Investor, should care about the home appraisal process.
If you’re an Investor, you are likely familiar with the BRRR method. With this approach, you are essentially buying a property with cash or hard money, fixing it up, renting it out, and then refinancing it through the bank to get your initial cash back out of the deal.
This means you HAVE to get an appraisal equal to or greater than your estimated after repair value.
If you don’t, you aren’t going to be deploying this method for long; as you’ll eventually run out of cash to invest.
The Home Appraisal Process
As you might suspect, appraisers follow a well defined process when it comes to providing appraisals.
As an Investor, it can be advantageous to understand the process from the Appraiser’s perspective.
The following process is right our of their playbook.
- Step 1 – Define the problem – As a general first step, an Appraiser is going to work to define the problem. This is basic stuff like defining the client, the client’s intended use, the definition of value, etc.
- Step 2 – Determine the scope – Next, an Appraiser will work to identify the scope of work for this particular effort.
- Step 3 – Perform data collection & analysis – Once they know what they are doing, they’ll start to collect general data about the geographic area; as well as specific data related the the target property.
- Step 4 – Apply the three approaches to value – Generally speaking, there are three different methods for figuring out the value of a specific property. For home appraisals, more likely than not, an appraiser will use the sales comparison approach. In other words, they are going to look at similar properties in your area that have sold recently to compile an opinion of value.
- Step 5 – Estimate the final opinion of value – In scenarios where the Appraiser has used each of the approaches to determine a value, they will then compare the outputs to try to find the final opinion of value. It’s interesting to point out here that they are not simply averaging the three values in this case. Instead, they are using their experience and understanding of the situation to try to make the best decision.
- Step 6 – Prepare the final report – Finally, once the Appraiser has come to a conclusion of the property’s value, they will compile a report for the client. There are a few different types of reports that can be compiled. However, in the care of a home appraisal, the Appraiser will typically compile what’s known as a form report. This is a report that is geared towards facilitating the underwriting process.
Home Appraisal Tips
Alright. So now you understand, from an Appraiser’s perspective, the workflow they’ll take to get to an opinion of value for your home.
So how you do you increase your chances of getting a great appraisal for your home?
Here are a few home appraisal tips:
- Know your comps and make a plan – As I mentioned, a home appraisal is mostly about looking at comparable properties nearby. Ideally, you need to do this BEFORE you buy the property so that you can buy it at the right price. To do this, you can use a site like Zillow to find similar properties in the neighborhood that have sold in the past 6 months. If there are some that have sold for a good bit more than yours, figure out what they have and make a plan to add those improvements to your property over time. When the time comes for an appraisal, you can provide the comps you used and point out that you’ve also made those improvements.
- Keep proper bookkeeping – Similarly, you’ll want to be able to present an accumulation of improvements to your property since you bought it. This means you’ll need actual records to point back to. If you use a tool like Mint to track your finances, auto-tag expenses from Home Depot and Lowes so that you can include those too. However you do it, just make sure you can clearly show a history of improvements to your home over time.
- Fix minor repairs and clean things up – As you get closer to doing the actual home appraisal, fix the minor issues that you know are a bad look. You shouldn’t have to spend a lot of money here; just make sure things are cleaned up and presentable.
As you can see, the home appraisal process isn’t super complicated; but is incredibly important to Investors.
Use the home appraisal tips I presented above and you’ll be fine.
If you have other experiences or tips, let us hear it on social.