HOME APPRAISALS – not really rocket science

Let’s first define a HOME APPRAISAL (or real estate appraisal).

property valuation or land valuation is the process of developing an OPINION of value for real property (usually market value).

OPINON! Yes you read this correctly. It is based on what someone thinks the property is worth. It is not based on using exact math formulas. Generally the appraiser will select from a number of SOLDS in the area close to the subject property (the one you are trying to find its worth) and use them in his report. He will make all the adjustments needed to come close to an apples to apples comparison.

The selection of comps is at the discretion of the appraiser. Most appraisers do a great job with selecting the best comps (SOLDS). However, the subject property will still be determined by the OPINION of the appraiser.

Say you want to do a rehab and you need to determine the AFTER REPAIR VALUE (ARV) of that property. You will go through a lesser detailed version of what an appraiser would do if you do an analysis yourself. You will look for COMPS in the area to use for your COST MARKET ANALYSIS (CMA). You will do the best you can to find the BEST COMPARABLES to the subject property so that you can have the BEST “guesstimate” as to the value of subject property after the rehab is completed. You will go through this same process if you are purchasing a property in its current condition.

It is important to note that if you plan to wholesale the property, you must pick/use the COMPS that will reflect what the property should look like once the rehab is done. Appraisers can do an appraisal that will reflect the ARV. You will have to submit your rehab plan to the appraiser so he knows what you will be doing to the property so he can adjust the appraisal accordingly.

The marketing materials you send out to your buyers (investors) should state the suggested rehab/repairs to the property and the BEST COMPS (remember the COMPS should reflect what the property should look like after the rehab). Investors with enough experience will be able to read your marketing material correctly and understand that you used COMPS that reflect the ARV. Because the COMPS are based on your choice (YOUR OPINION), there will be investors who will not agree with your choice of COMPS. It's ok. Keep in mind that’s THEIR OPINION. They would probably have used different COMPS than you. So again it is important that you use the BEST COMPS for the type of rehab you think will be done to the property so that the ARV will be reflected as accurately as possible.

As you can see when analyzing a property to find its’ market value, current SOLDS are important and of course which of the SOLDS will be used in the analysis. The choice of SOLDS is based on one’s OPINION as to why the COMPS where chosen, not based on any scientific or mathematical equation. I can’t stress that enough. I suggest using the BEST COMPS that have sold in the last 6 months. You definitely want current/relevant COMPS.

In closing, when you receive the appraisal on your property just remember that the appraised value of your property is based on what the appraiser THOUGHT it should be based on the COMPS HE CHOSE.

Leave your comments about this article. I hope it has enlightened some of you.

To your success.