Rental Property Appraisals: Refinancing Your Investment The Right Way

What are rental property appraisals and how do they affect your business?

A rental property appraisal is when a certified appraiser determines the exact market value of your rental property: how much the property is worth to the average buyer or investor in the current market.

In this article (and in part two, which you can find here), we’ll tell you everything you need to know about rental property appraisals, including:

  • Why you need an appraisal in the first place (including the difference between value and price, so you can think like an appraiser).
  • How much the typical appraisal costs.
  • What appraisers look for when they inspect your property.
  • What to do if your tenant doesn’t want an appraisal (due to coronavirus concerns or some other reason)
  • And, most importantly, how to make sure you get the maximum value estimate from the appraiser.

Why Do You Need An Appraisal?

At the time of this writing, according to Freddie Mac, one of the biggest federally-backed home mortgage companies, mortgage rates are at an all-time low of 2.81% for a 30-year fixed-rate mortgage.

Naturally, that means appraisers are in high demand. Everyone is realizing that they can seriously lower their monthly bill (and, if you own rental property, maximizing your cash flow) by refinancing.

But why? Why can’t you just buy a house or refinance your mortgage without having an appraisal?

Because almost every major lender—as well as the federal government—demands that an appraisal is performed on the property prior to supplying a loan. Sometimes, in specific instances, these requirements are waived, but that doesn’t happen too often. Lenders need a way of verifying the house is actually worth what someone is willing to pay for it.

Rental Property Appraisals: Koi Ponds... Are Do They Add Value?The Difference Between Value and Price

For that reason, appraisers are hired to find the market value of a property: how much the typical consumer would pay in the current market, because the market value is different from the sale price, which is how much someone did pay for that property.

Since home-buying is such an individual and emotional process, these two numbers can be wildly different. A particular buyer, for instance, might be enamored with a koi pond in the backyard of a property. He or she may be willing to pay an extra $30k for the property (let's just say they really, really like fish) but he or she isn’t representative of the typical buyer, because the typical buyer doesn’t really care about a koi pond (assuming it’s in a market area where koi ponds are atypical, which is much of the United States). Or the price might have been driven up by a bidding war, causing untold inflation.

If you’re a lender, you wouldn’t want to give out a half a million-dollar loan on a property that’s only worth $180k, even if the buyer is able and willing to repay the money. Anything can happen: the buyer could lose his or her job or come down with a terminal illness, making it impossible for him or her to repay the loan. In those instances, the bank needs to be able to sell the home in order to recoup whatever’s left of the mortgage.

If the borrower only paid off $40k of a $500k mortgage and the bank sells the house for the much-more-realistic $180k, they’re down $300k after closing costs.

So, to answer the question, “Why do you need an appraisal?” the simple answer is: because you have to. The more complicated answer is because, at scale, it saves the bank a lot of money—and, if you’re the unlucky buyer who is willing to pay more for a property than it’s worth, an appraiser might just save you money, too.

How Much Does A Rental Property Appraisal Cost?

The cost of your rental property appraisal will depend on a few factors, including where you live, the current supply and demand of appraisals, and the type of appraisal you need (which depends on the type of loan you’re taking out).

To give you a ballpark idea, most appraisals will cost anywhere from $300-500. The vast majority of those will be the standard 1004 Uniform Residential Appraisal Report (and if you’re really bored, you can take a look at it here), but since the start of the pandemic, some lenders are clearing exterior-only appraisals, which appraisers can complete faster because they don’t have to perform an interior inspection. And, if you’re lucky, you might even be able to get an appraisal waiver—so that there doesn’t need to be an appraisal at all.

However, most of the time you’re going to spend roughly $400 on a 1004, and the appraiser is going to have to perform an interior inspection. What does that mean for you?

What Does the Appraiser Look For When They’re In Your Property?

Every appraiser is different, but typically the appraiser is noting a few different things:

Rental Property Appraisals: Floor PlanThe floor plan

The appraiser will draw a sketch of your house, noting the exact square footage of the property, and the number and locations of rooms, bedrooms, and bathrooms (and sometimes windows, fireplaces, staircases, and other details) so that they can confirm that it lines up with the research they’ve done on your property using the MLS and public records. Also, with the sketch, the bank has an easy reference for what the house looks like on the inside, and whether or not there is any functional obsolescence—which is a fancy term for anything inside a house that doesn’t fit the market area.

For example, if there’s an additional bedroom that is only accessible through another person’s bedroom, it won’t really count as a bedroom, and it’s the appraisers job to make sure that they find accurate comparable sales in the market that are actually similar to the subject property.

Building materials and surfaces

If you look at the 1004, in the “Improvements” section, there are entries for exterior and interior materials and their conditions. The appraiser is also going to look at those and jot them down.

Quality and condition of the property

If there’s dampness in the basement, evidence of infestation, holes in the walls or ceilings, or dysfunctional plumbing, that’s going to seriously affect the value of the property. Depending on the lender and loan type (like FHA), the appraiser may or may not be required to check the plumbing. It’s best to make doubly sure it’s working before the appraisal.

Generally, though, a good rule of thumb is to use your common sense. Ask yourself, “Would the average buyer be okay with this?” If they wouldn’t be, it’s likely going to negatively affect the quality and condition of your home, and therefore the value. 

To continue reading, check out part two of this article, How Landlords Can Get Maximum Value From A Rental Property Appraisal, which covers how to handle a tenant who won't cooperate with an appraisal and how to get the maximum appraisal value for your property.

Last Updated: 
March 5, 2021

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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