How Appraisals Impact Your Loan and Refinances | The STRR Podcast #74 | Tim Hubbard

There's lots of pieces that go into a loan and getting approved for a loan, but a really, really big one is the appraisal. And in today's market, in a lot of places, prices are going crazy and appraisals are having a hard time keeping up. So we're going to talk a little bit about appraisals, what they are, how they're valued, and what you might be able to do if you get one that's less than the value you were expecting. So stay tuned, let's jump right in. Welcome to Short Term Rental Riches. Quick, actionable ideas to help you along your real estate investment journey, but with a specific focus on short term rentals. We're talking this week about appraisals, which is a huge piece of your loan, of your mortgage loan. And loans, as we know from prior episodes, are a huge piece of our investment philosophy. I've talked about loans quite a bit in the past on our podcast, so if you haven't yet, you can go to our website, website Strike. You can search for loans or lending and you can find all the podcast episodes that we've come out with talking about loans. But this week I want to talk about appraisals because things are going crazy in the US Actually in the world with asset prices, and that is real estate, because we're just pumping so much money into the economy that it has to go somewhere, right? And a lot of that money is finding its place in real estate. But there's a challenge here. Our appraisals have to come in at a certain value in order for our loans to go through. So this week we're going to talk about what an appraisal is, the different ways that appraisers appraise property. There's three main ways, some differences between commercial and residential appraisals because they're different. And then lastly, what happens if we get an appraisal that's less than what we were expecting? It could ruin your, your loan. It could make it so that you can't get a loan on the property. So we're going to talk about a couple of things that you can do if that happens. But first of all, what is an appraisal? Well, simply put, appraisal is the value, the expected value of your property. So we use appraisals for commercial and residential property. Shopping centers have appraisals. Small single family homes have appraisals. Multifamily buildings, apartments have appraisals most all of the time that we are using bank financing or any financing, unless maybe it's a hard money loan where you're getting a loan from a friend or someone that's not requiring appraisal. But almost all the time we're going to need an appraisal. There's several ways that appraisers appraise property. So the first way is through a sales comparison. And that's going to be the most familiar for everyone. That's what's used for residential properties. It's not always used for commercial properties, but that's what's used with residential properties. So if you're buying a single family home for $200,000, the appraiser's going to look within a certain timeframe at all the sales comps around that property within a certain distance as well, to see what type of properties are selling for. And they're going to use that to come up with the estimated value. And when they present the appraisal to you, you'll see those sales comps in there as well. So that's the most common way. But you'll also see on the appraisal that there's two other methods on there that they're going to include. One is the cost to build the property. So that's going to be take away the land. What does it cost to actually build this property that's not used very often. And then the third way would be an income approach. And so this is going to be more for investment property. If it's an apartment building, for example, how much income is coming in? And an appraiser can use rent comps again within a certain distance of the property has to be with similar properties. You know, you can't get rent comps from a D class ran down property to compare for a new purchase of an A class apartment building, for example. So those are the three ways, but most all the time lenders are going to go with the sales approach. Now if we're doing a commercial loan, I just want to talk about it real quickly because it is different. They do take longer and they do cost a heck of a lot more money too. So I'm doing two refinances right now, both on apartment buildings. And the price for a appraisal for a commercial loan can be significantly higher than your appraisal for single family home. Single family home, 500, $1,000 really, really depends. But it's probably somewhere in there. Your commercial appraisal can be 1500 to 3 grand. I mean, if you're appraising a really large apartment building, for example, that's quite a lot of work. And so it can be thousands and thousands of dollars and the appraiser has to do a lot of work. So you'll find that a commercial appraisal, it's going to be a lot bigger. It might be like 75 pages. Just totally depends on the size of the property. But they're gonna have some really important and valuable information in there. Your appraisal for your residential home's gonna be a lot smaller. And most of the time these days appraisers are using some sort of like pre set up documents. So they just plug in the information, then it comes out kind of in the same format. So the price is gonna be different. The time it takes to appraise it is also going to be different. So what happens if we're trying to get a loan and there's no comps, or the comps for our property are valued less than what we're paying for the property? Well, it could screw up our loan. Traditionally, a lender wants to see a certain amount of equity in the property. So if you've heard the term loan to value, that is what lenders will lend to, the total value. So a lot of times for an investment property that might be 70% loan to value, 75% loan to value, meaning the person purchasing the property either has to put down 30% or 25% and the lender's going to loan the rest. So let's say someone's buying a property for a million dollars and the loan to value from the lender is 75%, so they'll loan 750,000 on a property of a million dollars. Now what happens if you get your appraisal back and that million dollar Property appraises at 900,000? Well, a couple things are going to happen. They're not going to give you that same $750,000 for a property that was valued at $900,000, because they would be going above their loan to value. I don't know exactly what that percentage would be, but they would be loaning 85%, just for example, of the value. So a couple things have to happen. Either the purchase price has to go down, which means you have to negotiate with the seller, or you have to come up with the difference between what the lender will loan to you. So 75% of the 900,000 to still go to that million dollar purchase price. So you either renegotiate with the seller, you have to come up with the difference, which if you're in contract you only have a certain amount of time normally to come up with the fund, so that could be tricky. The third option is that you could detest the appraisal. You could ask to have it reappraised, which I've done before and I've been successful at before. It's always good if you're doing a refinance to provide the lender as much information as possible. If you renovated a property and you added a bunch of value, you want to show them that you want your value to be as high as possible. But on the purchase, you probably won't have that information to give to them. But you can detest the appraisal. You can find your own sales comps to show to the lender and say, hey, this just. This isn't accurate. There's a property down the street that's sold for this. It's possible the appraiser missed it in the report. I remember a few years ago, actually this is probably like five years ago, I was selling a property in California and the appraisal came in way less. Actually. It was a refinance. I take that back. So I was refinancing, pulling some money out, and it came in really low, or at least what I thought was really low. And we got a new appraiser and in a couple weeks we had a value, it was six figures higher than the other appraiser. I mean, within a couple weeks, because they either missed comps or whatever it was. So if you get an appraisal back and you're not happy with it, contest it, you know, there's good odds that you can have it altered in some sort. Now it's probably going to be a little easier to detest as a residential property than a commercial property, but not necessarily. I'm doing a commercial refinance right now and I just got a appraisal back for a small apartment building. It was way less than what I was expecting. And I know if I put it on the market right now, I could sell the property for way more than what the appraiser valued it at. The challenge here is that there were no sales comps. It's a smaller apartment building. And a lot of times apartment buildings don't even show up on public data. They get traded off the market. So the appraiser really didn't have any good comps to go off of. Now. It was still a good appraisal. I'm happy with it, and there's good loan terms. So I'm just going to have a little more equity in the property and taking a little less out on the cash out refinance. So it's all good, I'm happy. But if this happens to you and this is happening to lots and lots of people where they're trying to buy a home right now and because there's so much money in the market and home prices are going crazy, crazy high in some markets a lot more than others, there's no comps for people to evaluate these properties at. So try those three approaches. If you get an appraisal back and you're not happy with it, ask to have it reappraised. See if you can work out the deal with the seller. I've had that happen before as well. We were able to get a little lower purchase price and then the third option is just having to come up with the money. So be prepared for that. If you're in a real competitive market, that could happen. Hopefully it doesn't. But just so you're aware, that's a little bit about appraisals. They're constantly changing the way we do all these things. But that strategy for valuing properties has been pretty similar for a long time. It's based off comparable information in the market. Hopefully that helps clarify things a little bit and hopefully you guys are doing wonderful wherever you are in the world. If you haven't yet, check out our new website, Strict. You can find information there on whatever topic you want. You can just search, but you also have an easy way to reach request new topics. So I love talking about this stuff. I love getting information out there and I love hearing back from you guys. So thank you for joining us again for another week and until next time, have a wonderful day. Have a wonderful week. Want to get on the fast track to financial freedom through short term rentals? Well, it all starts with the properties you acquire, but you want to make sure that you acquire the right properties. I want to give you my ebook that will show you how to do just that. There is no charge. It's my gift to you for being one of our subscribers. Just go to restmethods.com that's R E S T methods dot com.