Real Estate Appraisals for Real Estate Investors

Bonus Module

In real estate investing, understanding appraisals is essential.

Below, we’ll walk through what an appraisal is, when you’ll need one, and how it impacts your transactions.

We’ll also cover the types of appraisals, the methods appraisers use to determine value, and what happens when the appraisal doesn’t match your expectations.

Whether you’re buying, selling, or refinancing, this guide will give you the information you need to handle appraisals confidently.

Table of Contents

Included below:

• Real Estate Appraisals for Real Estate Investors

• What is an Appraisal?

• Appraisal, CMA and BPO

• Types of Appraisals (Desktop, Drive-By, Full Appraisal)

• When to Get an Appraisal

• Appraisal Contingencies in Real Estate Contracts

• Appraiser Requirements

• Three Approaches to Value

• What Approach is Used in a Typical Appraisal?

• Understanding Market Conditions Addendum

• Focus on Comparable Sales for Single-Family Homes

• Normal Selection Criteria for Single Family Homes Comps

• What is an Adjustment?

• Example of Adjustments

• Do all Appraisers Adjust the Same Way?

• Price per Square Foot Adjustments

• Basements: Below Grade Square Footage

• Differences in Number of Bedrooms

• Bathrooms

• Garage Spaces

• Other Features

• Upgrades

• House Fronts or Backs to Busy Street?

• Views, Open Space, Golf Courses

• Solar

• Adjusting for Age, Condition & Quality

• Appraisal Summary of Adjustments

• Impact of Appraisals on Loan-to-Value (LTV) Ratios

• Special Considerations – Flipping a House

• Why Do Many Appraisals Match the Sale Price?

• Rules for Interacting with an Appraiser

• Challenging an Appraisal

• What You Can/Should Give to Appraiser

• Reading an Appraisal: Main Parts

• Appraiser’s Comments on the Appraisal Process

What is an Appraisal?

An appraisal is an informed opinion of value.

It’s conducted by a licensed appraiser who evaluates the property’s characteristics, condition, and comparable sales to determine its market value.

Appraisals are typically required by lenders to ensure that the loan amount is justified by the property’s worth.

While it's primarily used for financing purposes, understanding the appraisal process helps you make informed decisions when buying, selling, or refinancing real estate.

Appraisal, CMA and BPO

There are several methods used to estimate the value of a property, each serving different purposes.

Below, we’ll explore the differences between an appraisal, a Comparative Market Analysis (CMA), and a Broker’s Price Opinion (BPO), including when each one is typically used.

• Appraisal (Performed by a Licensed Appraiser) - An appraisal is conducted by a licensed appraiser who follows specific guidelines and regulations. Appraisals are typically required by lenders when financing a property to ensure the loan amount aligns with the property’s market value. It is a formal, detailed evaluation based on comparable sales, property condition, and market data. Appraisals are used for financing, refinancing, and certain tax or legal purposes, but not usually for listing or cash offers.

• Comparative Market Analysis (CMA) - A CMA is performed by a real estate agent by comparing recent sales of similar properties to estimate a home’s market value. It is commonly used for setting listing prices or evaluating what to offer during a purchase. While it relies on the agent's market knowledge, it doesn’t have the same level of detail as an appraisal. CMAs are used for pricing properties or quick investment decisions but are not appropriate when a lender or formal valuation is required.

• Broker Price Opinion (BPO) - A BPO is similar to a CMA conducted by a licensed real estate agent as a formal report and their official opinion of value. BPOs are often used by lenders for bank-owned properties (REOs), short sales, or for annual valuations in self-directed retirement accounts. They are typically less formal and less expensive than appraisals but offer more detail than a CMA. BPOs are used for lender evaluations of distressed properties or ongoing retirement account valuations but are not suitable for situations requiring a formal appraisal.

Types of Appraisals (Desktop, Drive-By, Full Appraisal)

There are several types of appraisals used in real estate, each with different levels of detail and cost. Which one is used often depends on the lender’s requirements and the risk associated with the transaction. Below are the three common types of appraisals and when each is typically used.

• Desktop Appraisal - A desktop appraisal involves no physical inspection of the property. The appraiser relies on public data, online information, and comparable sales to determine the property’s value. This type of appraisal is often used for refinancing or low-risk transactions where a physical visit isn’t necessary.

• Drive-By Appraisal - In a drive-by appraisal, the appraiser visits the property but only inspects the exterior. They assess the condition and location of the property while relying on public records and external observations to estimate the value. Drive-by appraisals are typically used when a full interior inspection isn’t required or feasible.

• Full Appraisal - A full appraisal is the most thorough option, where the appraiser conducts a physical inspection of both the interior and exterior of the property. The appraiser considers property condition, updates, and any unique features during the inspection. This type of appraisal is required for most purchase transactions and higher-risk loans.

We will be focusing on full appraisals for the rest of the chapter.

When to Get an Appraisal

There are specific situations in real estate when you’ll need to get an appraisal.

The timing and purpose of the appraisal will depend on whether you’re buying, refinancing, selling a property, or removing private mortgage insurance (PMI).

Here’s a breakdown of when to get an appraisal and the considerations for each scenario.

• When Buying a Property (Usually Required by Lender) - The appraisal is primarily for the lender, not the buyer. It’s typically done after you have an accepted contract, but you should ideally wait until after passing inspections before committing to the appraisal. This is because inspection negotiations are often the point where deals can fall apart. Though the lender orders the appraisal, you may need to pay for it directly outside of closing. Be sure to stay mindful of your contract dates and deadlines, coordinating with your lender to avoid delays. Rushing an appraisal can lead to additional fees, especially in fast-closing situations or during periods with heavy appraisal demand.

• When Refinancing a Property (Usually Required by Lender) - If you’re refinancing, an appraisal is usually required to determine the property’s current value. This helps the lender assess whether the loan-to-value ratio justifies the refinance, ensuring they’re not over-lending on the property.

• When Setting a Sales Price to Sell a Property - You might choose to get an appraisal to determine the value of your property, particularly if you’re selling without a real estate agent. However, it’s not commonly done unless the property is highly unusual. Keep in mind, if the buyer is obtaining a loan, their lender will require a separate appraisal regardless of your efforts. For unusual properties, appraised values can vary significantly, as the valuation is just an opinion.

• When Removing Private Mortgage Insurance (PMI) - If you’re looking to have PMI removed from your loan, an appraisal is often required. Lenders need to confirm that your property has appreciated enough for your equity to exceed 20% of the home’s value. This ensures that the loan-to-value ratio is low enough to eliminate the need for PMI, saving you monthly insurance premiums.

Appraisal Contingencies in Real Estate Contracts

An appraisal contingency is a key part of many real estate contracts. It protects the buyer if the property doesn’t appraise for the agreed-upon purchase price.

Here’s what you need to know about how appraisal contingencies work and what your options are if the appraisal comes in low.