I am currently working with 2 sets of buyers who are in contract to purchase their homes. Both the homes being purchased are flips – that is, the current seller purchased the home with the intent of upgrading it and then reselling it.
If the buyer is obtaining a mortgage to purchase a home, the lender will require an appraisal of the home. The goal is to make sure the buyer is not paying too much for the house – that the buyer will not immediately go into a negative equity situation. When an appraiser does her appraisal, she will look at the home being purchased and the upgrades that home has. She will also look at nearby comparable sales, and then she will adjust based on the features of each home and come up with an appraised value. Additionally, the appraiser will look at the land value of the property and calculate how much it would cost to build a new home, and come up with a cost value appraisal.
When a flip is being purchased, there’s another challenge involved. A home may have been bought only a few months ago for a significantly lower price, with work then done in that short time period. No home “appreciates” by $100,000 or more in 3 months, yet the current sales price may be much higher than the seller bought it for. In an appraisal for a flip, the appraiser needs to be able to see what work was done – it’s critical that the seller’s real estate broker talk with the appraiser and explain what was done and show any receipts defending the work.
Home one of the 2 that are in contract just appraised slightly above the contract price, that’s great news. The appraisal hasn’t been done on the 2nd home, but I’m confident it will appraise as well. I know that the seller’s broker has all the documentation and will be able to show the appraiser the tremendous amount of work done.
Even if a sale isn’t a flip, if there’s a mortgage involved, an appraisal will be needed. If you’re a buyer, ask your real estate broker to talk with the seller’s broker about how he will approach the appraisal. You want to make sure the seller’s broker is pro-active and prepared to advocate if necessary for the sales price. (The buyer’s broker can advocate with the appraiser as well, showing the comps she found to support the price to the buyer.)
Any questions about the appraisal process, talk with your broker or give me a shout.