When negotiating on a real estate investment, should I order an appraisal?
Usually… no. Most of the time, you can wait until the real estate investment is under contract before you order an appraisal. If you’re borrowing money to buy the property, you’ll need one for the lender anyway. If anything fishy pops up on the appraisal, you can usually back out of the deal on the basis of inadequate collateral.
Here are two more reasons for waiting to order an appraisal, along with one exception:
Appraisers Are Frequently Inaccurate
Some beginners are under the misconception that the job of an appraiser is to give you an accurate value for a house. The truth is, appraisers are just a safety mechanism. They protect banks from loaning too much money and buyers from paying too much for the house.
Unfortunately, the phrase "too much" is a relative term. When pulling comps and performing their calculations, appraisers can rarely achieve an exact value. Instead, they choose from a range of acceptable values, usually within 5% or so of the true market value.
As a result, you can have an appraisal that under values your house or overvalues it. Sometimes, the margin is also greater than 5%, making appraisals even more undependable.
You Should Know What the Real Estate Investment Is Worth
Besides, you should know what the house is worth without consulting anyone. You’re a real estate investor. Without a keen understanding of market values and repair costs, you’ll never make it in the business. The most talented investors I know can tell you the exact sales price of a house within five minutes of seeing it.
If you can’t do that, spend some time analyzing sales figures in your area. Pay attention to the differences in listing price and sales price, as well as the time on market. You’ll start to understand what things are worth.
For every investment, you should also pull comps from the area and compare them against your knowledge of the market. Then, you’ll know what the house is worth and you’ll have no reason to order an appraisal.
Order an Appraisal If You Need Extra Firepower
Here’s the one exception. Sometimes, you’ll know the foreclosure is overpriced but you can’t convince the bank. This happens for several reasons. You’ll occasionally find a realtor that overinflated their BPO to get the listing and is forced to fight for that higher value in self-preservation. Other times, the seller is just plain stingy.
Whatever the case, an appraisal from a respected company can give you a little credibility when negotiating. The downside is respected companies are often expensive. Are you willing to pay several hundred dollars to argue with an uncooperative seller? If it’s a high value property, sometimes it’s worth it. Otherwise, it’s better to just walk away without spending money on a real estate investment with poor chances of working out.