What Appraisal Method To Use On SFR?

Question

Does anyone use income cap method when making a decision to buy a SFR? Replacement method? Or strictly comparable sales method? Granted, we look at cash flow but what methods do most investors commonly use?

Marco Santarelli · Answer

Hi John Thedford,

Sorry for the delay... been very busy lately.  ;-)

The answer is not many.  The simple reason is it might be a waste of money to pay for an appraisal when you don't even control the property under a contract.  The best thing to do is some due diligence before writing up a contract.  Then of you have a reasonable expectation of value, you can lock it up and move forward on your financing (if applicable).

John Thedford · Answer

Robert  Conroy...yes! Buying RE is like getting married: easy to get into but sometimes not so easy to get out of! Always gotta look at getting out BEFORE you get in!

Robert Conroy · Answer

If you have MLS access - I do not think you need an appraisal, I run my own COMPS.   I do two tier COMP on SFRs - 1. Like/Kind SOLDS - to establish a baseline value. 2. Listed Props in that price range(I go $20k on either side), to establish price point based on the "affordability range". I always want to be the BEST DEAL in that price range.  If you are Buy&Hold, I still think its important to establish relative value - you always want to be prepared to exit.  I hope that helped.

John Thedford · Answer

Thanks Marco. I do understand the differences and have not bothered getting a formal appraisal or even a BPO before purchasing a SFR. I asked more out of curiousity and maybe a better question would have been how many investors actually get an appraisal before making a purchase. Thanks for your imput..and yes...continued success for all!

Marco Santarelli · Answer

Hi John Thedford,

When it comes to appraisals and financing on SFH, the comparable sales method is the standard.  The other methods don't make a lot of sense in terms of "fair market value".

However, if you're an investor and considering SFH as an investment, then you'll want to look at the entire cash flow picture detailing out the income and expenses to derive your rates of return (cap rates, cash-on-cash return, total ROI, etc.).

Hope that made sense.  If not let, me know.

Continued success!