Guide to Maximizing Real Estate Appraisal Value and Crafting an Appraisal Package

If you're looking to get the highest value out of your next residential real estate appraisal, look no further than this guide.

Whether you're gearing up to sell, refinance, or simply curious about your property's worth, the art of maximizing your residential real estate appraisal lies in the creation of a compelling appraisal package.

As a full time real estate investor with over 20+ properties & licensed mortgage agent, I found that in many cases, creating appraisal packages have definitely helped me in justifying and achieving the appraisal value that I am looking for.

Think of it as your property's resume, an opportunity to put its best foot forward. Let's explore why this matters and what key elements can make your appraisal package a game-changer.

1. Proposed Valuation & High Level Overview

Every good story starts with an introduction. Provide a detailed overview of your property—its size, unique features, and any recent upgrades. Think of this as the opening chapter, setting the stage for the appraiser to delve into the narrative of your home.

I like to highlight a couple key points in this section:

• My estimated value of the property from a comparables approach and income approach
• What the property was like before I purchased? Rents, bedrooms, condition etc.
• What the property is like now? Did I add more bedroom, increase rents, renovate the units etc.
• Example with details blocked:

2. Renovations and Upgrades

If your home recently got a makeover, flaunt it!

From a sleek kitchen remodel to energy-efficient installations, these upgrades not only make your property shine but can also positively impact its appraised value.

I try my best to highlight every upgrade made and the cost of the renovations.

If you're completing a multi-family property and facilitated cash for keys to create a larger upside in rents, make sure to highlight this as well.

You do not typically need to provide invoices, I usually don't, but you can include it in an appendix as an option.

3. Before and After Photos

In the art of presenting your property for an appraisal, the magic often lies in the visual story you tell.

This isn't just about capturing images; it's a strategic move to leave an impression on the appraiser. By aligning these visuals with the upgrades you've made, you're essentially handing over proof of the significant improvements you've invested in.

It's not just about words on paper; it's about painting a picture of your property's evolution that appraisers won't be able to ignore. These photos aren't just snapshots; they're your property's visual journey toward its highest value.

4. Comparable Properties

Introduce the appraiser to your properties recent comparable sales (comps). Handpick properties that mirror yours in size, amenities, and condition.

Of course, cherry pick some of the higher comparable sales if needed and justify why you property should be valued with them. By presenting a supportive material of high comparable sold properties, you're offering a benchmark that helps the appraiser gauge your property's fair market value.

Now, here's where your realtor becomes a crucial ally. Request this information from them, but also exercise caution in the selection process. Ensure that the comparables align with your property type and are in close proximity. In the world of real estate, a mere 1km can make a significant difference, taking you from a sought-after neighborhood to one with a less desirable reputation. Attention to these details is paramount, as choosing the wrong comps can potentially undermine your credibility with the appraiser.

Another savvy move involves showcasing the distinctive improvements your property boasts compared to the chosen comparables. Whether it's superior condition, higher rental yields, or a fully finished basement, these details can tip the scales in your property's favor. Lastly, make sure to include photos of the comparable properties which you can obtain from your realtor.

For those eager to take the extra step, consider making adjustments to the comparables. If the term "adjustments" is a bit hazy, fear not – we'll delve into that shortly. But if you're already acquainted, feel free to skip ahead to the next section.

What are comparables and what are adjustments?

When appraising a property, appraisers often use comparable sales (comps) to determine its value. Comparable property adjustments involve assessing the differences between the subject property and recently sold properties in the area. These adjustments help make the comps more similar to the subject property, allowing for a more accurate valuation.

Example: Imagine you're selling a house with three bedrooms, but one of the recently sold houses in your neighborhood only has two bedrooms. To account for this difference, the appraiser may make a comparable property adjustment by increasing the value of the two-bedroom comp to reflect what it might have sold for if it had three bedrooms. This adjustment ensures a fair comparison and helps determine the appropriate value for your property.

See example for more detailed adjustments:

Note - when you do the below chart- you can use best guess estimates. It's hard to assign an accurate value, appraisals are mostly opinion based. You can ask your realtor to help you with the below. But more than likely, you should probably use your best educated guess.

5. Income Approach:

In this section, the emphasis is on appraising your property through the income approach. While this method may not hold as much relevance for residential properties, it becomes particularly important if your property also serves as a rental property. In such cases, the income valuation can serve as an additional justification for the comparable approach, especially if the income valuation closely aligns or, perhaps, exceeds the comparable valuation.

The income approach is a method used to estimate the value of an income-generating property, such as a rental property or an apartment building. This approach is based on the property's potential to generate income in the future. It involves analyzing the property's net operating income (NOI), which is the total income generated minus the operating expenses.

• Net Operating Income (NOI) is a crucial metric in real estate, especially for rental properties. It represents the property's total potential income minus its operating expenses, providing a clear picture of its profitability. To calculate NOI, you subtract the property's operating expenses from its gross rental income.
• Let's say you own a rental property that generates $2,000 per month in rental income. The annual gross rental income would be $24,000 ($2,000 x 12 months). Now, consider the operating expenses for the property, including property management fees, maintenance costs, property taxes, insurance, and other relevant expenses, totaling $6,000 annually.
• NOI=Gross Rental Income?Operating Expenses
• NOI = $24,000 - $6,000
• NOI = $18,000
• In this example, the Net Operating Income for your rental property is $18,000. This figure is valuable because it gives you a clear understanding of the property's earning potential after accounting for essential operational costs. Investors use NOI to assess the property's profitability and make informed decisions about its financial performance.
• Note: For your operating expenses DO NOT include the mortgage payment, depreciation, income taxes or non-cash expenses. Also, I will include a 5% Repairs/CapEx reserve and typically keep property management expense at roughly 3.5% - 5% of total rental income

Capitalization rate, or cap rate, is a key metric in real estate that helps investors evaluate the potential return on an investment property. In simple terms, cap rate is the ratio of a property's net operating income (NOI) to its current market value. It is expressed as a percentage and provides an indication of the property's profitability. A higher cap rate suggests a higher potential return, but it may also come with higher risk.

• To get the cap rate, usually you can ask a realtor for estimated cap rate you should you use to value the property

Once you have the NOI and the Cap Rate you can use the income approach to find the value of your property.

• Suppose you have a rental property that generates an annual net operating income (NOI) of $30,000. The cap rate for similar properties in the area is 8%.
• Property?Value=NOI/Cap?Rate
• Property?Value=30,0000/8%
• Property?Value=375,000
• In this example, the estimated value of the property using the income approach is $375,000.
• This calculation provides investors with an idea of the property's value based on its income-generating potential and the prevailing cap rate in the market. Keep in mind that this is a simplified example, and in a real-world scenario, various factors and adjustments may come into play.

Example from an appraisal report

6. Property Features

Beyond the numbers and financial, showcasing your property's unique features adds a compelling layer to the evaluation.

Delve into the specifics – from the number of bedrooms and bathrooms to the allure of a finished basement or the convenience of a garage.

Lay out the electrical and plumbing systems, highlight the roof's durability, and heating source etc.

Don't hesitate to extract this from the original MLS listing; after all, a comprehensive understanding of your property's attributes can play a pivotal role in shaping the appraiser's perception.

7. Provide the report to the appraiser!

Once you've completed all the preparations, share a thoughtfully curated package with the appraiser.

Begin by expressing an understanding of their demanding schedule. Mention that you've put together a package to help their information collection process.

This package has property details, such as the number of bedrooms and bathrooms, detailed renovations with associated costs, before-and-after photos, and a breakdown of rental income and expenses.

Additionally, provide information on nearby sold properties for contextual understanding.

Politely inquire about the preferred email address for sending over this helpful package, emphasizing that you're readily available for any additional queries or missing details they may need clarification on.

This approach ensures you're assisting them in their appraisal process rather than dictating appraisal values, respecting various appraiser preferences.

8. Show up to the appraisal if possible:

In the realm of property appraisal, a strategic edge often lies in personal interactions.

Consider making a conscious effort to be present during the appraisal if circumstances allow. This not only puts a human face to the property but also lays the foundation for positive rapport.

A friendly demeanor, coupled with a willingness to address any queries, can potentially preemptively address concerns or pushbacks.

Remember, beyond the paperwork, the human touch can significantly influence the outcome of the appraisal process.

In summary, crafting a persuasive residential real estate appraisal package can help achieve the appraisal value you're looking for. Through a strategic blend of property evolution, renovations showcase, comparable properties alignment, income approach insights, and appealing property features, the package serves as a powerful tool to justify and achieve desired appraisal values. The personal touch of presenting the comprehensive report and, if possible, attending the appraisal enhances the potential for a favorable outcome in the appraisal process.

As a full-time real estate investor and licensed mortgage agent, I ensure that my clients implement this process to achieve strong refinances for their investment properties or even their primary residences. Feel free to book a call via the link in my bio if this is something you'd like to learn about or discuss further!