Can they make or break your real estate investment deal? What are the differences between appraisals and inspections? Are they both needed? How can they impact your real estate deal? These are questions that are important when it comes to starting a Real Estate Investment.
Appraisals are actually ordered by the bank while an inspection is ordered by you, the investor. The bank demands that you get one, they have to get one, versus an inspection which is optional. It’s recommended that you get an inspection but not necessary. You get this for your own peace of mind, the banks get appraisals for their own peace of mind.
What is it that banks do with an appraisal? They want to see whether the value of the house is whatever you are claiming it to be or whatever the seller is claiming it to be worth. It’s all about value. If you’re saying a house or a building is worth $500,000, the bank wants to see whether $500,000 is really the true value, or if you are just simply inflating it. If you’re inflating it, it might not go too well. On the other hand, an inspection is used to know what you are walking yourself into.
The real value of your Real Estate Investment
An inspection is used to see what is wrong with the house. What needs to be negotiated? What needs to be let go.
For example, if you find out the windows were not installed properly, then you can use this inspection to negotiate with the seller and say, “Either you fix that window or you’re going to have to knock down $30,000 out of the asking price.” That’s when the real negotiation starts.
You’re using the inspection for yourself and you also use it to make sure that there are no foundations or any major damages to the house. If the foundations are bad or the roof is about to fall off, you might want to reconsider buying that house.
Roofs cost a lot of money to replace and any foundation damage not only cost a lot of money to replace or fix, but also time. Depending on the condition of a property, you might not even get the permits from the city or the municipality to fix anything. Perhaps the house is not worth saving or renovating and it could be easier to tear down the house than to renovate.
Subjective Vs. Objective: Appraisals and Inspections
Believe it or not, appraisals are highly subjective while inspections are based on facts. Inspectors certify if a house is in a good condition. Appraisers take down the measurements, the square footage of a house, and then they look for comparable houses that were sold within the vicinity to verify if the sale price is consistent with the values in the area.
Banks typically have an appraiser or an agency they work with. They usually send their own appraiser to verify the property values and to keep the appraisal independent. If you bring your own appraiser, chances are they work for you, and they’re going to give the number that you want to hear, and the bank will probably not get what they want: accurate values.
In order to prevent all of that, banks work with their own appraisal agencies. Appraisals are based on opinions. That’s why sometimes there are disagreements with appraised values. As a customer, you have the right to request another appraisal (at your own cost).
On the other side, inspections are based on facts. Inspectors walk around the house, take pictures, and show evidence to prove something is broken, damaged, or needs fixing. There’s not a lot of argument against facts because the hard evidence is right there on the report.
Can all that make or break my Real Estate Investment?
Can any of these make or break your deal? It all depends on you. Can an appraiser really break your deal or not?
An appraiser could say: “based on my research, my professional opinion, and the comparables found in the area, houses that look like yours are selling for 450,000, not 500,000.” The bank will then work based on the 450,000 amount. Does that mean they’re going to deny your loan or end the loan? Not necessarily.
In this case, you have two options. You can either go to the seller and work out some type of creative financing for the rest of the amount needed, or you can come up with the rest of the money on your own.
How do you do that? Well, you can leverage credit cards, you can bring a joint partner, you can borrow money from someone else, hard money lenders, the choice is yours, but it doesn’t necessarily mean your deal is off the table just because the appraisal didn’t come back at 500,000. You can still get a hold of the deal. It’s all a matter of how creative you can get to come up with the difference that the bank is not willing to give you.
Now with inspections, can they really make or break the deal? That will also depend entirely on you. Let’s say you leverage your inspection report and you say to the seller: “I don’t like how these windows are looking. We’re going to need to talk about lowering the price or have you fix this.” Most often than not, sellers ends up working with you because they want to sell the property, maybe they need the money to go someplace else to invest, maybe they’re retired and they just want to enjoy a nice vacation with their grandkids.
So, can inspections and appraisals really make or break your deal? As you see, that will be entirely up to how you choose to proceed.
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