Why is it important to have an Appraisal and Inspection Report?

Question

:D Wholsaling is a great way to get started as a real estate newbie. However, I notice how some gurus don't teach their students to have an appraisal and inspection.
          
          All of the investors I know that have serious cash to buy requires you to have both. 
          
          It's important to have both to consider if it's a good rehab/fixer upper deal. If the inspection shows that the cost of repairs is more than what you are willing to pay and if the appraisal can't get you the arv you expected it's not a deal and these are two clauses you should have in your contract to come out of the deal without losing your earnest money.
          
          Okay, if it all works out to be a deal it's much easier to show a 25-30% spread to your investor-buyer when you have professional paper work to show the numbers.
          
          This also lets your investor-buyer know you've done your homework!

Jim Wineinger · Answer

The difference, Curt, is this is in the wholesaling section, not the buy and hold (landlord) section. Cash flow would be important only to those who will hold the property(ies) long enough for them to actually recieve some cash flow.

But in wholesaling the game is to fix (as needed) and resell at a profit.

Will Barnard · Answer

Kristian nailed it, but here is the complete explanation:
A wholeslaer locks up the good deal and provides the numbers to the potential investor buyers. These numbers are dervived from their own experience and the CMA (comps) for the ARV and their walk-through for the repair estimates.

It is the INVESTORS responsibility to get an inspection and appraisal (if they deem necessary).

So should you get an inspection as a buyer - YES (another set of professional eyes on the subject property for $350 is well worth it and another $450 for appraisal - investor's call. (for me, if it pencils with a ton of room, no need, if tight, perhaps)

Kristian Peter · Answer

Totally Agree!

But, the fact of the matter is that most wholesalers only provide a property and a CMA (because it can be done for free). Rarely does anyone get a full appraisal and home inspection, as the two of them usually add up to about $700.

If you provide both, I would love to buy wholesale properties from you - do you only work in North Carolina?

Bill Gulley · Answer

Josh, I agree, it's up to the buyer to perform his own due diligence and make an independent decission. Bill

Bill Gulley · Answer

Hi, Paul, this can be a tough crowd, LOL, your idea is a good one, but the points made above are all correct. One thing missed and you might consider is that if you look closely at your appraisal, the value assigned is for the client, the party that ordered it and it is done for the purpose stated. When you use the appraisal to justify your selling to a third party, you are violating the "agreement".
under which the appraisal was provided. When you show the appraisal to a buyer, they may rely on that expert opinion and the appraiser clearly stated that it was only for your use. If your buyer buys, relying on that appraisal that you provided, and it ends up being significantly less, he now has grounds to ask a judge to give him some money from you and perhaps the appraiser. Especially if the buyer is a new investor with limited knowledge. You just don't show buyers your appraisals, they were made for your use, your purpose at the time made. I'm not saying you would be sued, I'm saying you could be. You are extending the liability of the apprasier beyond the scope and purpose for which the appraisal was made.
Now, do we do that, sure, but if you do let someone see it, you need to tell them that this was done at that time, for your purpose, not theirs. Bill

Josh Green · Answer

paul as mentioned above, it is basically a waste on your side to provide this.

the people u will be wholesaling to will do their own 'due diligence' on the property. there is no need for you to cut into your profits to supply them with something that they probably won't use. they can see what issues need attention and usually have their own team in place to assess.

Paul Thacker · Answer

Hello Bill, Ryan, Jon and everyone else that replied and still others that will reply to my post.
                    I expect a reply and it can be good, bad, tough, rough, normal or abnormal.
                    Here's the truth - whatever works for you in your state without breaking the law "in your state" is great!
                    It's obvious you guys are more experienced and the feedback is more about learning what others do and how others think because at the end of the day we "ALL" do what we have to do to make it work and nothing is written in stone.  :wink:

Ryan Webber · Answer

I've wholesaled hundreds of houses and have NEVER (not once) gotten an inspection or an appraisal when initially purchasing the property.

I can only think of three properties that I've wholesaled where the buyer got an appraisal or an inspection, and all three were NOT serious buyers.  One was using an out of town hard money lender and two were buyers getting a conventional loan.  Now to be fair, others may have gotten a drive-by appraisal without me knowing, but in my experience serious buyers don't get an appraisal or an inspection.

Inspections are normally worthless with the majority of wholesale deals because many times some or all of the utilities are not even turned on, and there are normally significant repairs necessary to even turn them on.  On top of that most wholesale deals need extensive repairs that go far beyond the scope of an inspector.  What you really need is a qualified contractor to walk through and inspect/estimate the repairs needed.

In reference to appraisals, my experience is that even professional appraisals are not accurate of what a property will sell for on the retail market.

As a wholesaler, you will need to learn to accurately estimate what a property will sell for and the repairs needed on your own.

As a rehabber, if a wholesaler gave me an appraisal I would not waste 2 seconds of my time with it.  I need to crunch my own numbers from comps.  Now a professional inspection report would provide some benefit but keep in mind that the majority of what you will learn from an inspection report you would learn on a walk through of the property.  As a professional rehabber, an inspection report provides little to no real benefit to me either.

Just as Jon shared, don't trust anyone's figures.  Crunch your own numbers.  Don't leave any of your major financial decisions up to anyone else.  Do your own due diligence.

Echoing Jon again, wholesalers can wholesale to investors who are going to rehab to retail and who are going to rehab to rent.  Different properties appeal to different investors.  Some properties will be geared more towards landlords and cash flow, some properties will be for retailers and reselling, and some could go either way.

Curt Davis · Answer

I used to work for a company where we did home inspections, appraisals and even gave he buyer a home warranty.  But the reality is that when the investor purchased, then had the repairs completed, then had the bank do the appraisal it was usually $20k-$30k lower then our first appraisal we showed the buyer.

If you have an investor buying with cash an appraisal is not that important if they are buying for cash flow.

Jon Holdman · Answer

Someone who buys from a wholesaler could be buying for cash flow or for a fix and flip.

I've never had a wholesaler present a deal where they had either an appraisal or an inspection. They usually do have a value estimate, but its their own.  Similarly, they will have an estimated repair figure, but its their own estimate.  Inspectors inspect, not give bids.  Frankly, I never trust any figure a wholesaler provides.

Why is it important to have an Appraisal and Inspection Report?

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