by Mark Ainley
There was a forum question that caught my eye the other day. Basically, the question asked, “Should the useful life of a fully renovated house (little future cap ex) have a bigger influence on the property’s appraisal than recent sales in the area?”
The post was in regard to turnkey properties in areas with low comps. The quick response he got was, “If the property doesn’t appraise out, you shouldn’t buy it.” Which I think in general is a good rule, but I want to address here that it isn’t just that simple. The value of something is all a matter of perspective. So you have to remember whose lens you are looking through.
How Are Single-Family Homes Valued?
Single-family homes are valued via a comparable sales approach. An appraiser will go out and take a look at the property and compare that property to other properties that have sold in the area. He will make various adjustments to try and create apples to apples comparisons.
Why is This?
Owner-occupants buy the vast majority of single-family homes. So the value of the property is reflected from the perspective of the owner-occupant. How much will someone pay to live in this house in this neighborhood? And when they’ll be going to sell, how much will another owner-occupant pay to be in this neighborhood? The owner-occupant sets the market because they are the consumer. So the comparable sales approach is a snapshot of the market. It shows the value of a house relative to other houses in that neighborhood. It is market value for owner-occupants.
But who is really setting that value? Most would say other homebuyers, but I would argue that it isn’t them. It is the banks. The banks have the final say on whether the price the homebuyer pays is appropriate because they are supplying the majority of the money. The bank is out to protect its interest. They will not lend on a property unless the amount they are lending is less than the appraised value. When you look at it from the bank’s perspective, it makes sense. The bank is only looking at the value from the eyes of an owner-occupant.
What is the Value of a Property From an Investor’s Point of View?
An investor is going to value the property from an investment point of view. They treat it as though it was a commercial property. They look at the yield of the property. The amount of money invested versus the amount of money that gets returned. The value of the property is derived from the yield that someone is willing to accept, and this value can be very different from the appraised value.
Let’s try to understand this by using an example of a property in Beverly Hills. It shows the property sold for $1,950,000, and they are trying to rent it for $8,900 a month. This comes in at 0.45%. As a cash flow investor, depending on which rule you use — 1% or 2% — you wouldn’t buy this house. As a 1% investor, you would pay $890,000 and as a 2 percenter, you would be down at $487,500 for that property.
A cash flow investor would value that property very differently. There is a big gap between what the appraised value may be and what the investor’s value is. In this instance, it wouldn’t be a problem for an investor to get a loan on this property if he were able to hit its numbers.
On the other end of the spectrum, when you look at low priced homes in C or D-class neighborhoods, sometimes the appraised value will come in below what an investor may be willing to pay based off of the return. This doesn’t mean their value is wrong; it just isn’t in line with how the banks value single-family homes.
Appraisals are there to protect banks from overzealous homebuyers, which in turn protects homebuyers from overpaying for a property. I personally don’t think an investor should necessarily pay over the appraised value, but there may be some instances where a sophisticated investor may see more value in a property than what the appraiser may.
Do you invest in single-family homes? How do you calculate their value?
Let me know with a comment!
Interested in Finding out More? Reach out below
Address: 1415 Main St. #823, Grandview, MO 64030
This information is intended only for the use of the intended recipient(s) and it may be privileged and confidential. Please note that any views or opinions presented in this post are solely those of the author and do not necessarily represent those of the company. This is reposted information and is not original thought of Ireland Investments or anyone associated with the business.
Popular areas we service;
Kansas city Missouri, Overland Park Kansas, Kansas city Kansas, Olathe Kansas, Independence Missouri, Shawnee Kansas, Blue Springs Missouri, Lenexa Kansas, Leavenworth, Kansas, Leawood Kansas, Liberty Missouri, Raytown Missouri, Gladstone Missouri, Grandview Missouri, Belton Missouri, Prairie Village Kansas, Gardner Kansas, Raymore Missouri, Grain Valley Missouri, Ottawa, Kansas, Lansing Kansas, Excelsior Springs Missouri, Merriam Kansas, Harrisonville Missouri, Cameron Missouri, Mission Kansas, Kearney Missouri, Smithville Missouri, Pleasant Hill Missouri, Oak Grove Missouri, Bonner Springs Kansas, Roeland Park Kansas, Parkville Missouri, De Soto Kansas, Richmond Missouri, Greenwood Missouri, Paola Kansas, Basehor Kansas, Tonganoxie Kansas, Odessa Missouri, Peculiar Missouri, Platte City, Missouri, Higginsville Missouri, Lexington Missouri, Edwardsville Kansas, North Kansas City Missouri, Osawatomie Kansas, Louisburg Kansas, Fairway Kansas, Mission Hills Kansas, Sugar Creek Missouri, Riverside Missouri, Buckner Missouri, Pleasant Valley Missouri, Lawson Missouri, Plattsburg Missouri, Lake Lotawana Missouri, Weatherby Lake Missouri, Wellsville Kansas, Edgerton Kansas, Westwood Kansas, Garden City Missouri, Gower Missouri, Claycomo Missouri, Lone Jack Missouri, Drexel Missouri, Lake Tapawingo Missouri, Glenaire Missouri, Dearborn Missouri, Avondale Missouri, Osborn Missouri, Sibley Missouri, Oaks Missouri, Unity Village Missouri, Levasy Missouri, Randolf Missouri, River Bend Missouri, Jackson County Missouri, Johnson County Kansas, Clay County Missouri, Wyandotte County Kansas, Cass County Missouri, Platte County Missouri, Leavenworth County Kansas, Miami county Kansas, Lafayette County Missouri, Ray County Missouri, Clinton County Missouri, Bates County Missouri, Linn County Kansas, Caldwell County Missouri, Crossroads Real estate, 18th and vine Real estate, Hospital Hill real estate, library district real estate, longfellow real estate, dutch hill real estate, quality hill real estate, river market real estate union hill real estate, Greater downtown KCMO real estate, East Side KCMO real estate, Midtown KCMO real estate, Westport Real estate, Hyde Park real estate, Northeast KCMO real estate, Northland real estate, Plaza Real estate, South Kansas City Real estate, Fairway Kansas real estate, Kansas city Kansas real estate, lake quivira Kansas real estate, Lenexa Kansas real estate, Mission hills Kansas real estate, overland park Kansas real estate, prairie village Kansas real estate, Shawnee Kansas real estate, weatherby lake Missouri real estate, westwood Kansas real estate