When buying a foreclosed home, it is highly recommended that you obtain a foreclosure appraisal before purchasing the property. When you get an appraisal, the appraiser will provide you with a detailed report that provides you with the estimated value of the home you are considering purchasing. This information is incredibly valuable for both investors and potential homebuyers with an interest in purchasing distressed properties (foreclosures, short sales, etc.).
How Does an Appraisal on a Foreclosed Home Work?
In order to completely understand the appraisal process, it is essential to understand appraisal methods - specifically what is on the appraiser's checklist when he or she examines your property.
Before even arriving to your home, the appraiser will obtain key information about the property including the square-footage, number of bedrooms and bathrooms, and information about everything from water and septic systems to taxes.
Once they arrive, the appraiser will do the following (the order will vary depending upon the appraiser's preference):
- Take pictures of the property's exterior
- Examine the structure of the property (foundation, siding, roofing, etc.)
- Inspect the interior (quality of walls, flooring, windows, doors, etc.)
- Take note of amenities (central air conditioning, smoke detectors, garages, etc.)
- Look for upgrades (for example, kitchen or bathroom upgrades that have been made since the property was last purchased)
- Determine lot size (front and back yard space)
The appraiser will take each of these things into consideration when determining the estimated fair market value of the property.
Types of Value
It is important to understand that there are several different types of "values" when it comes to real estate. For example, there is the market value, value-in-use, investment value, insurable value, and liquidation value.
Market Value: The "market value" of a property is how much the home is deemed to be worth based on the house's aspects (number of bedrooms, bathrooms, location, etc.) and the current condition of the real estate market – specifically how much the home is estimated to sell for if it were sold in the next 30 to 90 days. This is the value that your appraiser provides.
Value-In-Use: Value-in-use is the value the property provides to its owner as long as the property is being utilized. This is typically less than the market value, but can be more.
Investment Value: The investment value is the value of the property to the specific investor depending upon his or her use for the property.
Insurable Value: The insurable value is how much it would cost to replace the property or how much of the home's value that homeowners insurance will cover. Insurable value may not equal the market value of your home
Liquidation Value: The liquidation value of the property is how much the home is worth if you are unable to sell it on the open market (i.e. if you had to close the sale in a limited period of time, such as in a short sale).
For the purposes of home appraisals, the value that you are looking at is the market value - what the property is worth based on the specific property and its condition and the current real estate market. This value is determined by the appraisal and a comparative market analysis (CMA), which examines how much other, similar homes in the local real estate market are selling for in the current real estate market.
Price vs. Value
When purchasing foreclosure properties, there is often a discrepancy about how much the home is worth (the market value) and how much it costs to purchase the property. Fortunately for the investor or homebuyer, you can often obtain the property for less than market value when purchasing foreclosures.
The cheaper you can purchase the home (below market value) the higher your chance of obtaining a better return on your investment - specifically if you purchase the price for below the market value and can sell it for a significant profit.
Therefore, the price of the property is not always indicative of the value of the property, which is why it is important to obtain a home appraisal (costs vary depending upon the appraiser) before making your purchase.
Below are three tips for hiring an appraiser:
Tip #1: Make sure the appraiser is licensed or certified. Although anyone can appraise your home, it is best to obtain someone who has formal training and knows what to look for when determining the market value of the property you are considering purchasing.
Tip #2: When hiring an appraiser, ask your Realtor or broker for recommendations. Your Realtor or broker will often have insider information about local, reputable appraisers as well as how much they cost. Remember, there is no such thing as a free home appraisal - all professional appraisers cost money.
Tip #3: Ask questions. If you have any questions about the appraisal process, how long the appraisal will take, what methods they use for appraising your property, etc. then make sure you ask. You can often tell how knowledgeable and easy an appraiser will be to work with by simply asking questions and paying attention to their responses.
At the end of the day, when purchasing a foreclosure property, it is important for you to have the property appraised to determine the market value of the property. Make sure you hired a qualified appraiser who is able to show you his or her license and/or credentials.