Appraisals

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Appraisals

David Greyshock
Corona, CA · Member since 2015 · 5 posts · 0 votes

I have been looking at turnkey investment companies lately for out of state investing.  One of the common themes is that there may be a discrepancy between the asking price and the appraised value(possibly higher)  Sometimes, this may push a 20% down payment into a 30-40% down payment because a bank will only lend 80% of the appraised value.  

My question is:

If a turnkey company actually spends a significant amount of money to replace the high ticket items, e.g. AC, furnace, roof, water heater, etc., why wouldn't an appraiser be able to account for that when using comparable sales that haven't had significant capex items done? A house built in 1980 with brand new EVERYTHING should be worth more than the same house with original mechanicals.

If big ticket items are essentially brand new, why shouldn't it be accounted for during the appraisal?

I understand the difference here between SFR and apartments, but still, a higher down payment in these cases may mean the difference between buying 1 SFR and 2.

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Mark Vejnar
Investor · Simpsonville, SC · Member since 2013 · 184 posts · 71 votes
10y

@David Greyshock

The hard and fast rules of the stock market will only serve to benefit you here. 

I think what we're talking about is the law of diminishing returns. The bulk of any home's value is derived from its location. The surrounding land use, housing trends, level of upkeep, etc., impact the intrinsic value of a given location. Subsequent to location are age, style, and condition - not necessarily in that order. Once a firm understanding of the structure and its place in the local economy have been determined we can then proceed to approaches to value. 

It is possible for a house to be completely renovated and for its value to remain constant when performing a sales comparison approach. If there are no renovated comps, there is no way to calculate, from a sales comparison perspective, how much the market is willing to pay for the renovations performed. However, we can observe that renovated homes may sell faster, which can this render a time adjustment - but time adjustments are tricky requiring lengthy explanations in the addenda. 

For turnkey you will be far better served by disrgarding (or minimizing) sales comparisons and focusing instead on income and cost. 

Renovations that are already complete increase your NOI as you don't have to pay for them moving forward. Obviously you'll have maintainance expenses moving forward, but they should be less on a renovated structure.

Renovations also reset the clock on remaining economic life - fundamental tony he cost approach. This changes depreciation in your favor - talk to your real estate focused CPA. Get a detailed list of the renovations for your records to justify the calculations. Also ask the appraiser to show you what record of renovations is in the work file (all appraisals have a "work-file" that is maintained by the appraiser) and make sure all work was considered from a cost and income perspective. 

Therefore, the big ticket items should be accounted for, but not necessarily from a sales comparison standpoint.  

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    You have to also consider that the seller may truly have the home overpriced.  Just bc you spend a ton of money on a home doesnt mean it will appraise higher.  

    Some of this also comes down to the appraiser themselves.

    My questions for you is, would you bring additional money for down payment if your property you were purchasing appraisal came in lower? You would technically be paying over market value for the home.  

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
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  • David Greyshock
    OP
    Corona, CA · Member since 2015 · 5 posts · 0 votes
    10y

    Yes I have considered the fact that the seller has the home overpriced, but my question is: Do they really? Whether an investor would be willing to pay over market value for a property is entirely up to them. Factors included would be if they could fetch a higher rental rate, if they would avoid Capex in the next 10 years, if it would make a difference with a lease option.......

    Appraisals use comps for SFRs and that is the standard , however, I wonder if a SFR that has been completely renovated can be truly compared with one that has not had anything done to it since it had been built originally.

    The issue is that perhaps they are comparing apples to oranges.  If a property has been renovated with completely new "B" class amenities in an older class "B" area , wouldn't that reflect on an appraisal?  That makes sense since it works within the value-add strategy for multifamily properties, i.e. bringing a property up to the current standard.

    I wonder; if an appraiser did actually take the level of renovations into account, would it possibly change the local market and cause others to follow suit.

    0Reply
  • Steven Gesis
    Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes
    10y
    Originally posted by @David Greyshock:

    I have been looking at turnkey investment companies lately for out of state investing.  One of the common themes is that there may be a discrepancy between the asking price and the appraised value(possibly higher)  Sometimes, this may push a 20% down payment into a 30-40% down payment because a bank will only lend 80% of the appraised value.  

    My question is:

    If a turnkey company actually spends a significant amount of money to replace the high ticket items, e.g. AC, furnace, roof, water heater, etc., why wouldn't an appraiser be able to account for that when using comparable sales that haven't had significant capex items done? A house built in 1980 with brand new EVERYTHING should be worth more than the same house with original mechanicals.

    If big ticket items are essentially brand new, why shouldn't it be accounted for during the appraisal?

    I understand the difference here between SFR and apartments, but still, a higher down payment in these cases may mean the difference between buying 1 SFR and 2.

     Hi David-

    I would discourage purchasing anything below the appraised value, at minimum you should be at appraised value, which is ok, considering some regions in the midwest, the appraisers are still conservative. Below, is not acceptable in my strategies, to your point the appraiser would have accounted for it. Bringing an additional 20% down payment is not a very strategic move, you want to get the second unit, so you can begin diversifying and spreading your risk. Your contract should be contingent on appraisal. Do not fear to exit a bad deal. Also, keep in mind, it may not be the seller, it can be the appraiser, they are human and they come in different flavors, I know it is a "science" but, this science has taken us though a series of ups and downs, so do not be discouraged by the provider, if you are satisfied with them to this point, if this is a questionable event, as part of either recurring events int he transaction, it may be time to exit. 

    My number #1 Rile = Kiss Method (Keep it simple stupid)

    Checkout this resource about investing out of state: A Simple Guide for Buying Out of State Turnkey Investment Property

    Much luck, happy investing!

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    It sounds like you're trying to talk yourself into over paying for a property.  Yes, yes appraisers will take into account upgrades and rehab. Most turkeys Are overpriced, using bogus, non real world "no maintenance costs", no management fees for a year, etc. to make the bogus numbers look good.  Do Not pay above appraisal, period.

    0Reply
  • David Greyshock
    OP
    Corona, CA · Member since 2015 · 5 posts · 0 votes
    10y

    Wayne Brooks- I am not trying to talk myself into over paying.  I come from stock market investing where hard and fast rules are the norm.  My question was more along the lines of why the big ticket stuff isn't taken into account during an appraisal.  I would think that they would be of less value to a homeowner than an investor, but for the gap to be so large between a newly renovated property and one that needs significant capex (and isn't marketed to investors) to be so large is a bit of a head scratcher.  

    Perhaps I've spent too much time analyzing multi-family properties.........

    Steve-I totally agree about spreading risk; my wife and I are looking at investing in multiple cities across the country for that exact reason.  We have been searching for properties that fit our criteria and it's no skin off my back to walk away from something that doesn't fit.  I'm just surprised that since turnkey is becoming more mainstream (or has been for a while) that complete renovations seem like a waste.

    0Reply
  • Steven Gesis
    Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes
    10y
    Originally posted by @David Greyshock:

    Wayne Brooks- I am not trying to talk myself into over paying.  I come from stock market investing where hard and fast rules are the norm.  My question was more along the lines of why the big ticket stuff isn't taken into account during an appraisal.  I would think that they would be of less value to a homeowner than an investor, but for the gap to be so large between a newly renovated property and one that needs significant capex (and isn't marketed to investors) to be so large is a bit of a head scratcher.  

    Perhaps I've spent too much time analyzing multi-family properties.........

    Steve-I totally agree about spreading risk; my wife and I are looking at investing in multiple cities across the country for that exact reason.  We have been searching for properties that fit our criteria and it's no skin off my back to walk away from something that doesn't fit.  I'm just surprised that since turnkey is becoming more mainstream (or has been for a while) that complete renovations seem like a waste.

    I understand what you are staying, a whole home renovation is very much worth it, especially if the provider is doing it right. A good home will also a good tenant, will garner more ROI.... simple equation, sometimes appraisers are more conservative than you would expect to see..... as I mentioned you are dealing with humans still :)

    0Reply
  • Mark Vejnar
    Investor · Simpsonville, SC · Member since 2013 · 184 posts · 71 votes
    10y

    @David Greyshock

    The hard and fast rules of the stock market will only serve to benefit you here. 

    I think what we're talking about is the law of diminishing returns. The bulk of any home's value is derived from its location. The surrounding land use, housing trends, level of upkeep, etc., impact the intrinsic value of a given location. Subsequent to location are age, style, and condition - not necessarily in that order. Once a firm understanding of the structure and its place in the local economy have been determined we can then proceed to approaches to value. 

    It is possible for a house to be completely renovated and for its value to remain constant when performing a sales comparison approach. If there are no renovated comps, there is no way to calculate, from a sales comparison perspective, how much the market is willing to pay for the renovations performed. However, we can observe that renovated homes may sell faster, which can this render a time adjustment - but time adjustments are tricky requiring lengthy explanations in the addenda. 

    For turnkey you will be far better served by disrgarding (or minimizing) sales comparisons and focusing instead on income and cost. 

    Renovations that are already complete increase your NOI as you don't have to pay for them moving forward. Obviously you'll have maintainance expenses moving forward, but they should be less on a renovated structure.

    Renovations also reset the clock on remaining economic life - fundamental tony he cost approach. This changes depreciation in your favor - talk to your real estate focused CPA. Get a detailed list of the renovations for your records to justify the calculations. Also ask the appraiser to show you what record of renovations is in the work file (all appraisals have a "work-file" that is maintained by the appraiser) and make sure all work was considered from a cost and income perspective. 

    Therefore, the big ticket items should be accounted for, but not necessarily from a sales comparison standpoint.  

    3Reply
  • William Hochstedler
    Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    To add to @Mark Vejnar's comment, it is very difficult for an appraiser to qualify the level of improvements because they haven't necessarily done home inspections on the comparables.

    For example, how would an appraiser quantify a $5000 new sewer line?  As a buyer, you want this because you'll have 50 years of life expectancy, but the appraiser can't assume that the comparable sewer lines were problems.  We do extensive remodels where we are often rebuilding the house from the inside out.  Yet we never get new construction comparables.  These are simply the limitations that an appraiser has.

    That being said, this is a problem for your provider and you should move on.  I would never get into a project that couldn't be sold profitably at market value.  Moreover, if the turnkey provider is doing this, they should already have the valuation problem solved by using lenders and appraisers that understand their projects.

    When appraisals don't justify asking price, it points to the turnkey provider not knowing what they're doing or fleecing you.

    1Reply
  • Steve S.
    Lender · Los Angeles, CA · Member since 2015 · 800 posts · 229 votes
    10y

    There is a massive trend in appraisers being ultra conservative due to the backlash of them being ultra aggressive pre-2008. Ever since Dodd-Frank and TRID the whole marketplace for appraisers have changed. The over regulation is a major problem. I am not saying we should go back to the wild wild west, but the over expansion of government into the banking world is simple ridiculous. You are now experiencing the repercussions of that. Sorry.

    1Reply
  • Cliff Mccue
    Investor · Chicago, IL · Member since 2012 · 111 posts · 73 votes
    10y

    @David Greyshock

    I started off in finance.   My job was to recognize mispricings in the market place.  Everyone had their own valuation models and they used them to calculate their own internal fair value.  If the market was under priced relative to this you bought if it was overvalued you sold.  There are dozens of pricing models for stocks no one model is right.

    When you look at appraisals, what is the purpose of the appraisal?  I would argue the primary focus off an appraisal is to protect the lenders interests and a bi product of that is protecting the buyer's interest.  The bank doesn't look at single family and small multifamily homes from the buyer's(investor) point of view.  They look at it is what is the current market price in the area and am I paying over market value.  Which is fine, since they are putting down 80% of the money.  

    Now when you start to look at commercial properties valuations tend to get cloudier because the lenders will look at it as an investment.  They will look at the cash flows of the properties and they will make adjustments to their inputs relative to a variety of factors regarding the property.  One example would be quality of cashflow.  If you have a retail strip full of national chains vs nail salons.  The valuation would be different depending on who your tenants are, with all other things the same.

    With that all being said, currently single family homes and small multifamily are only viewed as owner occupant and their values are derived by comparable sales.  There are plenty of turnkey operators that sale at or below market value so as a buyer there is no reason to stretch to make something work.  

    Lastly, one thing that is not addressed in the appraisal.  It is the quality of the property manager.  I would argue the quality of the property manager is more important to the value of the property from the investors point of view than what the house next door sold for.  A bad property manager will destroy your investment, just like management of a company you own stock in.  They can either create value for you or destroy it.  This will never be adjusted for in an appraisal.

    0Reply
  • Mark Vejnar
    Investor · Simpsonville, SC · Member since 2013 · 184 posts · 71 votes
    10y

    @Steve S.

    I'm not an appraiser anymore but I was back then. 

    It's not that we were super aggressive back before '08; it's that buyers and sellers were shaking hands on crazy prices. Appraisers knew the bubble was unsustainable as early as 2004 - and we discussed it at syposiums, forums, continuing ed courses, etc., but we are not regulators and can't stop people from making decisions that financially ruin them. Appraisers can only formulate opinions based on and supported by available market data, and the market is a manic-depressive bipolar sociopath. 

    @William Hochstedler well said. 

    @David Greyshock wait are you saying the appraisal value is higher than asking price? I know some turn-key guys sell below appraised value. I'll say that (even it goes without saying) if you are able to purchase a property below appraised value then go for it! Just be sure you read the report, do some due diligence on the appraiser who signed it (call some peers) and be sure the price is below all three approaches: sales comparison, income, and cost. Also be sure to thoroughly read the addendum as this is where the bulk of analysis and explanation takes places. 

    0Reply
  • David Greyshock
    OP
    Corona, CA · Member since 2015 · 5 posts · 0 votes
    10y

    I'm sure there will always be some variation in market value vs asking price. But some of the quoted after repair values have been many thousands over the market which was why I asked the question.  The replies here have been very informative for sure.  I also agree with the above post related to the added value of not having major repairs because everything is new.  I'm surprised that appraisals for SFRS are approached a little differently if they are an investment.

    0Reply
  • Zach Evanish
    Rental Property Investor · San Diego, CA · Member since 2012 · 185 posts · 105 votes
    10y

    @David Greyshock While property valuation/appraisal is not an exact science I would be very careful about purchasing any property that does not appraise. While there is definitely some value that should be given for buying a property that has been rehabbed and has a tenant in place I don't think it should be more than 5-10%. If you are interested in out of state rentals I suggest checking out www.roofstock.com.  

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    Nice plug @Zach Evanish I am guessing since you are in San Fran you are just selling someone else's homes as an affiliate correct?

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
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  • Zach Evanish
    Rental Property Investor · San Diego, CA · Member since 2012 · 185 posts · 105 votes
    10y

    @Curt Davis Our company is headquartered in Oakland but we have a local team in every market. We are not an affiliate. We are a marketplace for cash flowing single family rental properties. We pride ourselves on being extremely transparent as we look to remove the frictions involved with buying and selling occupied rental properties. Feel free to send me a direct message if I can answer any other questions (Don't want to take over David's forum post)

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  • Marc Knapp
    Rental Property Investor · Westchester County, NY · Member since 2015 · 33 posts · 9 votes
    10y

    Thank you @David Greyshock @Curt Davis and @Steven Gesis for your comments and incredibly helpful insight shared on this thread. Very much appreciated. My husband, Marc and I are buyers in a situation where the appraisal came in at our exact offer amount after the appraiser said he could not do the appraisal without seeing our purchase agreement which reveals all of our contingencies etc. including our offer.

    Once again, the appraiser appraised the home at the offer price we have offered, free and clear. However, he said that the home is only appraiser at this amount IF the seller makes all the necessary repairs to the property outlined in the inspection (and for our bargaining purposes, some outlined in the purchase agreement). The seller, understandingly, refuses to make all of the repairs and also will not go down in price because he frankly has no reason to. The appraisal DID come in at the amount of the offer we had previously negotiated. The lender will now not allow for a conventional mortgage loan and states that our only option is delayed financing. We do not like this option as we are currently in the process of offering on two other properties for which we need the capital for down payments.

    Perhaps the BP community could kindly offer insight on two questions:
    1. Why do appraisers require to see the purchase agreement prior to appraising the property? Doesn't this automatically infuse bias in the appraisal process?

    2. Beyond the lender's speech on the telephone that delayed financing is the way to go, how do we ensure that if we were to choose to go forth with this option, that delayed financing is guaranteed and at 75% of purchase price we paid?

    Thanks ALL! Any insight and guidance is much appreciated!

    Ana-Maria

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