Your investment property’s value is a critical number in determining your profits. Whether you’re investing in a property, looking to refinance your existing mortgage or selling your property, a home appraisal can dramatically change your profit margin. Let’s explore what a home appraisal is, how it works and what you need to know.
Table of Contents - A Single Appraisal Can Drastically Change the Landscape of Your Property Deal
What is a home appraisal?
A home appraisal is an unbiased estimate of a real estate property’s fair market value. During a purchase and sale transaction, the home appraisal determines whether;
- The contract price is fair based on the home’s condition,
- The location of the home
- The home's features
- Recent sales and other factors.
If the homeowner wants to refinance their home loan and lower their mortgage interest rate, the lenders will require an appraisal.
An appraisal is needed to make sure the lenders don’t lend more money than the home is worth.
Lenders don’t want a homeowner to borrow too much or put the borrower into a negative situation. If the homeowner defaults on the mortgage and goes into foreclosure, the lender will sell the home to regain their money. If they loaned for more than the house was worth, they won’t recoup their loss.
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How appraisals work
An appraisal is usually ordered and is owned by the lending company because it affects the lender’s interests. However, the borrower usually pays for the appraisal. The fee is generally determined by a flat rate plus the complexity of the property. The amount of time to complete the appraisal is also a factor. Typically the cost of an appraisal is $300-$400.
A qualified real estate appraiser will conduct the appraisal. Appraisers are certified through the Canadian National Association of Real Estate Appraisers or the Appraisal Institute of Canada. Each province may also have additional licensing requirements. The appraiser is an impartial third party and does not stand to benefit from the sale or refinance outcome.
The appraisal can last from 20 minutes to an hour. The appraiser will do a complete visual inspection of the interior and exterior, and with the homeowner’s consent take photographs. During that time, they will look for a variety of factors that impact her valuation decision, such as:
- Square footage
- Number of bedrooms and bathrooms
- Systems like HVAC, plumbing
- Interior-exterior finishes
- The quality of any improvements
- Any deficiencies or required repairs
Other factors that impact the property valuation are the neighborhood and the sale price of nearby similar properties. The appraiser will use market sales data, public land records and public tax records to make his final decision.
Appraisers won’t give a valuation on site. After completing the home inspection, they will continue their research to make a final valuation judgment. Although the homeowner pays for the appraisal, the appraiser’s client is the lending company. The homeowner will receive a copy of the appraisal, but the appraiser answers to the bank first.
How the appraisal affects your profit potential
When you’re buying a property, the appraisal is part of the closing process. Hopefully, the appraisal will be at or above the contract price, and you can proceed with buying the property as planned.
If the appraisal evaluates the home at a lower price, your deal could be delayed or cancelled. The bank won’t lend you more money than the house is worth. A lower valuation is a great bargaining tool to get the seller to lower the price.
If the seller doesn’t trust the appraisal and won’t lower the price, you have these options;
- Speak to the appraiser.
- See what comparables the appraiser used.
- Find better comparables and supply them to the appraiser.
- Find out if the appraiser will amend their value based on the additional information.
When looking to refinance your property, a low appraisal can prevent you from securing a better rate from the bank. Your appraisal needs to be at or above your previous valuation. Again, a second opinion or additional information can help you get a more desirable valuation. The final number may also influence your rental rates if you have tenants.
If you’re selling your investment property, the appraisal will impact how much you earn in closing. A low valuation means you’ll need to lower your selling price; no one wants to pay more for a property than necessary.
If the housing market was hit hard in your area and nearby homes are low-priced, you can make the case for your property. You can show the appraiser that your home is in better condition or has more amenities than similar homes to try to get a higher valuation.
Know your properties worth
A real estate appraisal is an important part of the home owner’s journey. When you’re investing in real estate it’s critical to determine how profitable you’ll be. An appraisal ultimately ensures you’re paying the fairest price possible, and may even tell you your investment property is worth more than you realized.
When you finally decide to refinance your mortgage or buy a new home, it's important to speak to your lender first. You may have an appraiser contact that you want to utilize to help support your home's value, but, not all lenders use all appraisals.
Scott from LendCity Mortgages was telling us how he has seen lenders not use the appraisal the client had ordered, and now they are out additional money because they have to pay the banks' appraiser.
Your lender will be able to provide suggestions to you of which appraisers they prefer, to help you find the best one.
What Do Real Estate Appraisers Look at During an Appraisal?
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