How to Appraisals work?

Question

Hello Everyone,

I am here wanting to fully understand the appraisal process and I would be appreciative if anyone can give me feedback.
I am also appreciative if anyone can provide some resources such as articles or books to understand the topic more.

Below are some of the questions that I had.
1) Do appraisers go inside the property that is being appraised?
If they don't - Are the insides of the property not considered when looking at comps?
2) If I am looking to do the BRRRR - what is the number one thing that I can do to increase the appraised value?(not including adding square footage)
3) What is the total cost of doing a refi? outside of the cost of the appraisal - do you have to pay for items such as a loan origination fee, title costs relating to recording a mortgage, etc

I appreciate everyone's help!

Account Closed · Answer

Hi Basit, an appraisal is ordered by the lender you apply to. You end up paying the $500 to $700 fee for the appraisal. The appraiser has to go into the property and most will measure each room individually and count the number of bedrooms, bathrooms etc.  They then will find 3 or 4 properties that have sold in the last 6 months within half a mile with the same design, sq footage, year built etc. They are not home inspectors. That is a different job.

The best way to increase the value of a home is to find one being sold "under valued" because it is "dated" and do the upgrades to the level of the houses in the neighborhood. Don't over rehab. You will lose money.

Every rehab is different so guessing a cost is pulling numbers out of the air. It depends on the level of improvement, labor costs, materials costs, time costs, carrying costs, property tax, insurance, and on and on.

A refi has loan origination costs, appraisal, prepaids, escrow, title, recording etc.

Josane Cumandala · Answer

Hey Basit. I'm a residential appraiser so I'll answer as best I can. An appraisal in essence is an opinion of market value based on supportable data compiled by a trained professional.

The scope of work and methodology will depend on the type of property and the lenders requirements. The answer to question number one is most likely yes, the appraiser will physically inspect the property. But this is not always necessary in all cases. It depends on what the lender wants and if they have any prior appraisals of the property in question.

Traditionally appraisers use three different methods to arrive at value and reconcile the three - the sales comparison approach, the income approach and the cost approach. For residential properties the sales comparison approach which is where you look for sales in your market area that most closely resemble your property and make adjustments for any dissimilarities to come up with a value that an informed buyer would most likely be willing to pay for the property.

The income approach is more mathematical. The appraiser determines what the property can realistically rent for as a basis for the value of the property. This probably won't be done on a single family home.

The cost approach I'm not going to bother to talk about but it's basically about ascertaining the value of the land and breaking down the cost of building the same property new. It's imprecise and only done by banks for insurance purposes and it drives me insane as an NYC appraiser valuing century-old townhouses that simply can't be built anymore. xD

What you can do to impact the appraisal really depends on the type of property. Are you buying a single family? Small multi-family (2-4 units)? In that case the sales comparison approach is most accurate and unfortunately your value is pretty much based on what your neighbors paid for their homes in the past twelve months. The only part you can control is the condition of the property, but there is a diminishing return on that cost when you factor in things like the school district, the lot size etc. My advice is study your market carefully and do not over-spend on renovation if sales in your area don't seem to sell for much higher after a certain amount of improvement. You can convert a garage into a bedroom or renovate the kitchen but if its on a small lot in an undesirable neighborhood it won't impact the value as much as you might think. It's important to know your market and work with true local experts who know how to get the most bang for you buck on these things.

If the property is a 5-unit or larger it's considered a commercial property and then you have much more control over the value. The premise of the income approach is what we should all be familiar with as investors - that the property is worth only so much of the income it is able to generate. So if you're doing a value-add deal where you are renovating the units, performing capital improvements, and raising rents you are increasing the appraised value directly.

Hope that helps! Feel free to Pm me any questions if something isn't clear.

Chris Mason · Answer

1. Yes.

2. Property specific question. The saying is that "kitchens and bathrooms sell homes," but if the kitchen was updated 5 years ago while the garage hasn't been touched since the 60s, then that rule of thumb goes out the window.

3. Yes, but typically lenders roll closing costs into the loan balance on a refi, rather than having you pay out of pocket.

Jason Lee · Answer

1) Appraisers go inside the property in NYC. The longest I've had an appraiser in a property is about 20 minutes, the shortest was less than 5 minutes. They mainly take measurements, photos, and make note of different features that might affect the price. They often have a printout of the floor plan and the listing if it's for a purchase. They don't go inside the comparable apartments used in the appraisal.

2) Creating an additional bedroom by dividing a large room, closing off a dining alcove, etc.

3) This is out of my wheelhouse but I would say mortgage recording tax and title insurance but you can avoid much of the recording tax by doing a CEMA. Maybe a banker can weigh in.

Alexander Felice · Answer

1. usually yes, there are instances where they won't but for this, you'll want them to

2. Your house will be worth what the next door neighbors house sold for. You can't affect this number as much as you can affect what you pay for it in the first place. Make your house just SLIGHTLY nicer than the one next door, but pay much less to get there

3. There will be a cost to the loan, but this will be hard to estimate and lots of variables. as Chris said, many times the lender will wrap the loan costs into the note to save you cash, ideal on a BRRR, but you will likely pay a higher rate to do so in exchange. Overall the costs to refi are relatively low (few grand tops)

How to Appraisals work?

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