"The Real Estate Appraisal: Find a Good Property Appraiser!"
A real estate appraisal, or property appraisal, is often a necessary evil. You may have to deal with appraisals if you are
refinancing rental properties,
or even applying for a home equity loan or line of credit (HELOC). If a traditional mortgage lender is involved, one or more appraisals will almost certainly be mandatory.
YOUR GOAL: MAXIMUM APPRAISED VALUE
Whether you are buying, selling, or refinancing, your goal is always to maximize the appraised value of the property.
If you're the buyer, your lender will require that a certified property appraiser physically inspect the property prior to making a commitment to lend, to confirm that the price you are paying makes sense. Similarly if you're the seller, you want the maximum appraised value to ensure that your buyer gets the financing needed...or else the deal will fall through and you're back to square one.
A real estate appraisal can also come into play when a property is not in the process of changing hands (i.e., if you're refinancing or cashing out equity). Here again, the higher the appraised value, the better off you'll be.
For example, when getting a HELOC, your existing mortgage plus the incremental line of credit can typically not exceed 80% of the property's appraised value. Obviously, the higher the appraised value, the larger your line of credit.
Similarly, real estate appraisals will also determine your ability to refinance. The appraised value must be high enough to pay off your old mortgage and other expenses, while still leaving you with a 20% equity cushion (i.e., 80% loan-to-value ratio).
For example, if you need a mortgage of $80K to pay off your private lender and rehab costs, then the property must appraise for at least $100K. Otherwise, you may need to pay money out of your own pocket to get the loan back to the 80% LTV that traditional lenders prefer.
To maximize the appraised value on a rental property that you currently own, you must make sure the property is physically presented in the best possible light. Most people recognize this as
While a property appraiser is not really supposed to factor curb appeal into their valuations, they are human. I believe that a nice presentation will subconsciously influence the appraiser's determination of value. At a minimum, it certainly can't hurt!
BUYER OPTIONS IF YOU GET A LOWER-THAN-EXPECTED VALUE
If you're buying, you'll get some major heartburn if the property appraiser hit you with a valuation that in lower than the sum of the proposed mortgage amount plus your down payment. In other words, if you're putting down $5K and your loan amount is $175K, the property must appraise at $180K. Luckily, you do have a few options if your appraisal comes in too low.
OPTION #1: DROP THE PRICE
One option is for the seller to agree to reduce the price to match the appraised value. Obviously, unless you're in a very slow market, the seller will be reluctant to agree to this.
OPTION #2: PUT MORE MONEY DOWN
Another option is to increase the amount of your down payment. For example, let's say that the purchase price is $200K and you want to put 10% down ($20K). To get this financing, the real estate appraisal must come in at a minimum of $200K.
Now, let's say that the appraised value only comes in at $190K. You could fork over the $10K in the form of a larger down payment to make up the difference. Your down payment is now $29K (10% of $190K = $19K, plus the extra $10K).
The downside of this is that your out-of-pocket requirement is greater, but the upside is that your monthly loan payments will be lower and you will have 15% equity right out of the gate ($29K / $190K) compared to the 10% you initially expected.
OPTION #3: SELLER NOTE
Another option is to ask the seller for a secondary note to make up for the lower-than-expected value from the property appraiser. In other words, in the scenario above you could ask the seller to lend you the extra $10K.
Typically, you'd make monthly payments to the seller for a set period of time, with a balloon payment at the end. This keeps your out-of-pocket expense at the initial level. The downsides are that some inexperienced sellers may not be willing to do this, and your monthly loan payments will be higher because the interest rate on the seller's note will be a few percentage points above what a bank would have charged.
OPTION #4: DITCH THE BANK
Another option is to ditch the bank altogether and use a private lender. Private lenders often won't require any appraisals, so you can bypass his step. The private lender may also be willing to reduce your down payment requirement, perhaps even financing 100% of the property's value.
The main downside is that your interest rate will be substantially higher, but usually this can be mitigated because you can often secure interest-only payments, plus you could always refinance in a year or two.
OPTION #5: WALK AWAY
The final option if you get an undervalued real estate appraisal is to simply walk away from the deal. Do this if the seller will not budge on the price, if you cannot come up with additional down payment money, and if you cannot find a private lender. Sometimes, things just are not meant to be.
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