Appraisals – Find, Negotiate and Fund Better Deals

Beauty is in the eye of the beholder … and in real estate, an appraisal is what gives you the unbiased, third party opinion on a property.

Appraisals happen whenever a lender is involved in a transaction, but that’s not the only time you’ll need or want an appraisal.

We’ll examine the three ways appraisers can evaluate a property, why you shouldn’t accept an appraisal as gospel truth, and how you can use an appraisal to SAVE money on your next deal

In this episode of The Real Estate Guys™ show you’ll hear from:

  • Your valuable host, Robert Helms
  • His admiring co-host, Russell Gray

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Understand what an appraisal is

Nearly everyone who has purchased a property has dealt with an appraiser. In most all cases involving a lender, an appraiser is involved.

A lender is one of several parties interested in the value of a property. The seller, buyer, and lender all have an interest in knowing about value for different reasons.

But, an appraiser has no vested interest in a property’s value, making them the neutral third party. However, even though they are neutral, it’s good to keep in mind that their appraisal is an opinion of value.

While lenders are often interested in an appraisal to check out the value of the home versus the loan, it’s a FANTASTIC tool for investors, too.

Appraisers can determine the value of a property based on future use. Depending on what improvements or changes an investor plans to make, the value of a property changes.

So, why would you need to understand valuation?

  • To secure a loan
  • To evaluate a deal
  • To understand your portfolio’s value

An appraisal doesn’t only happen when evaluating or completing a real estate deal. It’s a way to understand your portfolio and properties at any point along the way.

Decode the jargon

An appraisal has a very specific purpose. Its job is to solve a problem: what is the highest and best use for this? That’s the challenge.

Appraisers in many countries use the same methods and standards to solve this problem. The Appraisal Standards Board (ASB) develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP).

The appraisal report is created using a combination of three methods:

  1. Sales comparison method. Look at similar properties and what they’ve sold for recently.
  2. Capitalization approach (income approach). This is the value the property based on the income it generates. What are people renting for right now? Where else could they go locally? In some cases, there aren’t many comps to look at, so the income a property is currently generating might be more appropriate.
  3. Summation approach (Cost segregation approach). Look at the income from the property and ask: What would it cost today for the land, construction, and development? This is a way to appraise a large, one-off or unique building.

The appraisers job is to look at the value based on these approaches and to weigh them properly.

How to use an appraisal report

Since appraisal reports are a third-party opinion of value, they aren’t set in stone, and shouldn’t be taken as the gospel truth.

Once you know what goes into an appraisal report, you can think critically about them and extract the parts that are useful.

And, it can be a valuable tool for negotiation.

In some cases, if an appraisal comes back LOWER than the offered price, it’s appropriate to go to the seller and start with that valuation in the negotiations.

Or, if you’re planning to go in on a deal with someone else and need to split the property value later, an appraisal is that neutral party that provides the numbers.

As with any expert, appraisers have a WEALTH of knowledge, and it’s worth learning a little about their craft. Some appraisers have some impressive niches, including airports, commercial buildings, and even haunted properties!

If possible, try to be on-site for an appraisal and learn what the appraiser is looking for. All of this information feeds into your education and foundation on how to improve properties to get the best bang for your buck … especially in a refinance or a sale.

Appraisals are a valuable tool for an investor. Whenever possible, be sure to spend the money on an experienced, well-respected appraiser. Then, when you get your report, understand the value AND the limitations of a report as you make your important investment decisions!


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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Property Inspections – Protecting Yourself from Hidden Problems

It’s been said, “The devil’s in the details.”  

This is certainly true when it comes to buying real estate…even unimproved real estate.  After all, there’s so much that the naked and untrained eye just can’t see, which is why property inspections are so important.

In this episode, we take a look at some of the myriad of property inspections available to help investors uncover hidden problems, avoid unexpected expenses and gain leverage in negotiations.


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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.


 

Inspections are a very important part of real estate investing.

It’s just smart to have a trained expert objectively evaluate the condition of all components of a property so you don’t end up walking blindly into a costly repair or remediation.

In The Real Estate Guys™ radio show studio B unraveling the mystery of property inspections…

  • Your ace detective of discussion, Robert “Sherlock” Helms
  • His joker sidekick, Russell “Watson-of-a-Gun” Gray

Property inspections is a HUGE topic.  And because it’s far too technical and time consuming to do a comprehensive explanation of all of the many inspections available, it’s important to start out with some essential principles.

Property Inspections are Cheap InsuranceGetting a property inspection is cheap insurance

Every real estate transaction has a LONG list of various and sundry expenses.  In your zeal to reduce expenses and maximize profits, it’s easy to skip an inspection or two.

Bad idea.

You only need to miss ONE major thing…or even a minor one…to see all that “savings” just disappear.

With that said…

Only Get Inspections on What You Plan to Keep

There’s no point to paying for structural inspections on a structure you plan to tear down or a roof you plan to replace.  Duh.

Attend the Inspections if You Can

Even though you can and SHOULD read the inspection reports when you receive them, they’ll mean a lot more if you’re actually present when the inspection takes place.  This way, you can see things in person and ask questions in real time.

Hire QUALITY Inspectors

Hire qualified and experienced property inspectorsLike any profession, you’ll find dedicated, competent, diligent providers.  And you’ll find those who are lazy, incompetent and inexperienced.

Take a guess which one’s cheaper.  Take another guess about which one costs more.  Now guess which ones you should hire.

Duh.

Inspect the Visible and the Invisible

Even novice investors can understand inspecting the roof and physical structure.  But don’t forget things like title…and sometimes the soil.

Sometimes there are things lurking underground or behind the walls, which are literally toxic…and VERY expensive to fix.

Sometimes there are easements and restrictions which can affect your plans…and the value.

Use Protection

Using professional representation can be a great way to have another set of experienced eyes looking over everything.

Sometimes investors try to “save” commissions (which are paid by the seller anyway) by representing themselves or using a friend or family member who happens to have a real estate license, but no substantial relevant experience.

We think it’s just smart to use a real estate agent who is experienced in the type of property you are buying.  Someone who’s been involved in many similar transactions will often think of things you won’t.  And they’ll have a better idea about what kind of concessions are reasonable in a given market when something is discovered which necessitates a renegotiation (“re-trade”).

Order Your InspectionsTrust but verify - seller's are supposed to tell you ALL about the property. But sometimes they leave things out.

For newbie investors, a property can seem like a complex creature.  In reality, a property is a whole lot less complex than your car or body.

A piece of dirt with a physical structure on it is simply an assembled combination of easy to understand components.  The idea of property inspections is simply to discover the actual condition of each of these components.

So think about it from the ground up…

  • The dirt – title report, environmental report (usually commercial)
  • The infrastructure – sewer, septic
  • The structure – foundation, structure (termite), electrical, appliances, HVAC, plumbing, roof
  • Structural toxins – lead (paint), asbestos (ceiling, insulation), mold

Remember…Knowledge is Power

An accurate assessment of the property’s condition is essential to putting together a budget for Cap Ex (capital expenditures, i.e., initial fix up) and operating budget (reserves, contingency).

But in cases where defects aren’t known or properly disclosed by the seller and therefore not built into the pricing, your property inspections provide some leverage in renegotiating the deal.

The idea is that the price offered was offered based on what was known about the property.  When something major comes up, it’s reasonable to ask for adjustments.  It doesn’t mean you’ll get them, but you definitely won’t if you don’t ask.

With that said…

Don’t Major in the Minors

No one buying a “used” property should expect it to be perfect.  There will be a certain amount of wear and tear…aka deferred maintenance.

So when you craft your offer, you should already have that built into your price.

And if you find something in your inspections which you didn’t expect, you need to decide if it’s worth potentially blowing the deal up over.  That is, you should ask yourself, “If the seller refuses to fix this, then am I willing to walk away?”

If not, then think twice about asking for a concession.  ESPECIALLY if the market is red-hot and the seller’s holding back up offers.

Avoid Seller Surprises

Ordering property inspections before you sell can prevent unexpected and unwanted surprises laterUp to now, we’ve focused on this whole issue from the BUYER’s perspective.  But what about the SELLER?

We think it’s smart for a seller to order up most of the major inspections BEFORE putting the property on the market.  This way, you know what the buyer is likely to find.  And you can price your property accordingly or budget for concessions you’ll need to make in a re-trade (re-negotiation).

Sure, this adds some extra expense.  And the buyer’s probably going to want to order their own inspections anyway.  So why bother?

First, as noted, this allows you to price your offer and/or adjust your own expectations for net cash.  No point making big plans for an amount of net proceeds you’re not going to get.

Also, if the buyer’s inspections show more problems than your inspections, you’ll already have a second opinion.

Plus, having the inspections sets a professional and honest tone for the transaction.  It builds trust versus suspicion.  This good will is very handy for any back and forth that might occur during the transaction.

Do Ask, Do Tell

Keep in mind that once you know about something “material”, as a seller in virtually all jurisdictions (in the U.S.), you’re required to disclose.  Omitting a material fact is akin to misrepresentation.

Now if you’re a sneaky character, you may think it better NOT to know, so you’re under no obligation to disclose.  After all, you can only disclose things you know…or where the law deems that you have SHOULD know.

BUT…if the buyer is going to order inspections and find things out, they’ll probably tell you when they start bargaining.  So you’re probably going to find out anyway.  And then if the first offer falls apart, you’ll have to disclose to every subsequent buyer anyway.

So we think it just makes sense to find out early, correct what makes sense BEFORE you market the property, price your property appropriately for its true condition, then disclose everything.

Ghosts of Transactions Past

Proper real estate disclosures help prevent old transactions from haunting your futureEven if you “get away” with selling a property with a major undisclosed problem, a duped and angry buyer may decide you cheated him…and come back to unwind the transaction or sue for damages.  Who needs that?

Worse, if you’re active in the market, you don’t want to be known as “that” guy…the one who tries to cheat buyers.

It Pays to Be a Pro

We think it’s better to be a pro.  So whether buying or selling, be sure you get quality property inspections from qualified providers, and use them to negotiate a deal that is fair to both sides.  You may pay a little more or net a little less, but you’ll sleep better at night…and you’ll build a better reputation.

Plus, when word gets out that you’re a straight shooter, market participants may give you preference when it comes to bringing you deals or buying your inventory.  And that can be worth a LOT.


Listen Now:

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.