How Landlords Can Get Maximum Value From A Rental Property Appraisal

A rental property appraisal will tell you exactly how much the property is worth to the average buyer or investor in the current market.

In part one of this article, we talked about why rental property owners need an appraisal, how much an appraisal typically costs, and what the appraiser looks for when they’re on your property.

In part two, we'll talk about how to handle a tenant who won't cooperate with an appraisal (due to coronavirus or some other reason). We'll also drop some helpful hints for landlords who want to get the maximum appraisal value for their property.

Let's get started!

Can a Tenant Reject an Appraisal?

What should you do if the tenant won’t let an appraiser inspect the property?

If the tenant refuses to let an appraiser come in and look at the property, review the lease agreement with them. Typically the lease agreement has a section specifically on what to do about this, but usually you only need to give the tenant 24 hours notice before you send in an appraiser. In that case, all you have to do is send them a “notice of intent to enter” and you’re all good.

Given that there’s currently a pandemic, though, you might not want to force outside contact on an at-risk tenant. You don’t want to create an unsafe scenario for either the tenant or the appraiser, and forcing contact without a lease provision and reasonable notice is begging for legal trouble.

Tell your lender about the scenario, and they’ll work out possible solutions with you. As we’ve mentioned before, there are appraisal options for some loan types that are exterior-only.

How to Get Maximum Value for Your Rental Property Appraisal: 4 Tips To Remember

And, finally, the section that could possibly help your bottom line the most: How do you get the highest possible appraisal for your property? Is there anything you can say or do that’s actually going to help the value? Or is it all out of your hands?

Here are our four best tips, in order from most-impactful to least-impactful on the value:

Provide the appraiser with a list of improvements

This is the biggest one. It’s not immediately clear to the naked eye where and when any improvements have taken place—particularly if the house is a bit of a mess, which we’ll talk about soon—but if the bathroom, kitchen, and roof have all been replaced in the past five years, you can expect that to seriously help your value.

On the other hand, if the appraiser doesn’t have any information on improvements, they might miss a couple, which could lower the quality and condition of your house, forcing the appraiser to pull up comparable sales that don’t reflect the renovations or remodels.

Fix up anything that’s in serious need of fixing up

If you’re working with a “well-lived-in” property, make sure that there aren’t any glaring maintenance issues. Again, you can use your common sense here: if you think it would bother a typical buyer, it’s probably something that the appraiser is going to note in the 1004.

Keep the property clean on the inside and out

The appraiser doesn’t care about whether or not there’s clutter around the house, and they don’t care about interior design. They likely see hundreds, if not thousands, of houses per year, so nothing is really all that surprising. However, if you want the best possible appraisal, you want to create the best possible environment for the appraiser. For the best possible appraisal, pretend you’re staging an open house.

Be on time to let the appraiser in to the property, and be respectful

This one should be a no-brainer, but do your best to be kind and respectful to the appraiser. This person, after all, is in charge of determining the value of your property, and oftentimes it can make or break your deal. If the appraiser knows that you need an appraisal completed by Thursday in order for a loan to clear, but you showed up 45 minutes late to the inspection, they might prioritize some other reports before finishing yours. If, on the other hand, you’re professional, helpful, and kind, they’re going to do everything they can to help you out.

Conclusion: Handling Appraisals the Right Way

In conclusion, let’s summarize all of the topics we listed in the beginning:

Why do you need an appraisal?

You need a rental property appraisal because 1) interest rates are incredibly low and it’s going to help your bottom line, and 2) it’s required by most major lenders, as well as the federal government.

How much does an appraisal cost?

The typical appraisal is going to cost anywhere from $300-500, but a good rule of thumb is about $400.

What do appraisers look for when they look at your property?

The floor plan (including overall square footage), building materials and surfaces, and the quality and condition.

What do you do if the tenant refuses the appraisal?

Review the lease agreement with your tenant. There’s typically a section about this exact situation. If they’re an at-risk member of the population during the pandemic, then review options with your lender.

How do you get the maximum value for your property?

Provide the appraiser with a list of improvements in as much detail as possible, fix up anything inside or outside the house that’s in dire need of fixing up, keep the property reasonably clean, and be kind and respectful during the appraisal.

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.

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:

The 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.