Cash out Refi - Appraisal

6 Replies

I'm coming up on my 1-year anniversary of owning a particular investment property that I purchased with cash and I'm looking to do a cash-out refi (for more RE investing, of course!).

First off, I'm assuming that the 12-month seasoning period of owning the home still applies if I want to use the appraised value instead of the purchase price?

Also, for those of you that are either mortgage/appraisal professionals or have been in a similar situation recently, will the appraiser use the income approach or the traditional sales comp approach? I'm hoping for the income approach since the rent I get is decent and the recent solds in the area are pretty low.

The house is a SFR in Mableton, GA, and I've had a stable renter with a 1-year lease since acquisition, if that helps.

Thanks for the insight guys!

Victor

SFRs will use the comps approach, not income. These days they will tend to use the lower end of available comps, too.

Victor - I recently did this exact same thing, and Jon is right - they're going to use traditional sales comps.

I figured as much since it's a SFR, but was hoping for a different answer :) Time to plan accordingly! Thanks again guys.

Victor

This will depend on your market. In my market, SFR rentals are very common and half the purchases are cash. Usually ample data exists to extract GRM's. In many instances, it would be misleading not to complete the income approach.

You have to understand why an appraisal is required, and then you can understand why the value for SFR is going to be based on comparable sales.

The lender wants an appraisal to get a value for the collateral, so that in the event that there is a default on the loan, and the collateral is seized, the lender can recover the principle amount remaining on that loan. The collateral would be sold to recover that money, and in the case of SFR the sale does not have to be to some landlord. So if value based on comparable sales produces a lower number than value based on income, then that lower appraised number will be what the lender goes by. And you can expect that when the income approach produces a lower appraised amount, the lender will still use the comparable sales approach for SFR - because that is more likely how it will end up being sold.

Often banks will request an operating income statement and rental survey be completed within the appraisal assignment, so they are concerned about the property's ability to churn rental dollars. The appraiser will have to reconcile the values indicated by each approach developed (sales comparison, income, and cost) to one final opinion of value. It's possible the appraiser could weight the value indicated by the income approach more, but I typically see appraisers putting more weight on the sales comparison approach regardless of what approaches were developed.

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