One of the most common questions real estate investors ask is the key differences between an appraisal and a valuation.
What is a Property Appraisal?
An appraisal is simply someone providing an opinion on the value of the property. The context of the opinion can be important to understand the weight of the value of the appraisal. If you are looking to appoint an agent to sell your investment property, it would be good to get an idea of its value. The agents will provide an appraisal of the real estate value, but there is no enforceable action at the end of the day if the sale price is ultimately below the appraisal value. The agent could blame the real estate market risk and conditions at the time. Or they highballed the number to win the listing.
The appraisal is simply an individual’s professional opinion of value and a written appraisal is a step up from an informed opinion.
Difference Between Desktop Appraisal vs Full Appraisal
If you do happen to need an appraisal to get an idea value of the investment. There is a distinction between a desktop appraisal vs full appraisals. A desktop is simply an appraisal where the appraiser has not inspected the property for the report.
The report will note that the appraisal is a desktop appraisal. It is considered a less reliable form of appraisal as in a perfect world, a person who visited the property will have a better understanding of the property’s value and specifics vs someone looking up the info from a desk.
Also, there are several subjective factors on the location that can come out of the inspection, which cannot be captured from a google maps review. Inspection of the mechanical equipment’s general condition can present a more accurate view of future capital expenditure requirements rather than just looking at the property manager’s photos or the person commissioning the report, which will have a bias.
Also, it is important to understand what the appraisal will be used for. In some instances, lenders will not accept a desktop appraisal. And as a general rule, the inspection date is when the appraisal valid for.
When is A Desktop Appraisal Appropriate?
There are some instances where a desktop appraisal is appropriate, for example, if the apartment or house is very generic and built to similar quality and scale to comparable products in the same location. As the differentiating factors rise, it is more reliable to have a full appraisal.
Also, many services provide a desktop appraisal, which is a quick estimation of value. Maybe it is not 100% accurate but if you use them consistently, it provides a general direction view of changes in value overtime. For example, if it valued the property at $300k and then $330k a year later. The model valuing the property is mostly unchanged, and the only change is the variable, and the variable output showed that it is worth 10% more. It might not be accurate to the fullest, but it gives a rough guide of value and growth rate, which is good enough for tracking purposes.
Is fair market value the same as appraised value? fair market value vs appraisal
A valuation can be formed using a combination of valuation methods. Fair value is simply an opinion of what the property will sell for in the current market. Fair value is determined primarily from comparing the subject property’s characteristics with the comparable transaction in the market and then extrapolating the transaction metrics to the subject asset. An appraisal is more property-specific, while the fair market value takes a wider view of the market supply and demand dynamics.
Then What About a Property Valuation?
The way we see it is that a property valuation is a step up from appraisal as the person assigning value to the property is putting pen to paper. The valuation will have standard disclaimers so that you can’t really do that much if you valued property in June and sold it in December. However, the valuer undertaking the valuation is professionally qualified. If you really want to know a professional opinion of the property’s value, you will hire a valuer with a nationally recognized firm or someone with a long history of valuing properties in the market and asset class.
The benefit of a property valuation is that it provides a view on the property’s value from an independent perspective and follows a tried and test valuation methodologies accepted by the market.
From a real estate strategy point of view, it can show if the business’s sale price is a reasonable endeavor or you are taking aggressive in your investment assumptions. Now we don’t rely on the valuer’s opinion just because it is written on paper, but it could be a good test of our investment case.
From a financing point of view, a bank providing the senior mortgage will usually require an external valuation of the collateral. In some instances, they would also want to instruct the valuer. The report provided will be for first mortgage purposes and in the worst case the bank will sue the valuer if there is evidence of negligence.
Also from an investment perspective, many REITs or private real estate funds will hold the asset at book value. The book value is a direct result of a valuation undertaken by a valuer.
From the list of appraisal vs valuation differences above, a valuation is a strong form of evaluating the property value vs appraisal. Appraisal has its uses if you need a quick understanding of the property value but we wouldn’t put too much stock into it.