Today’s REI Classroom Lesson
Kelly McDonald explains the differences between various types of appraisals. It’s important to look at how long you have to close, your expertise, and the level of rehab that was done.
REI Classroom Summary
Kelly goes over the different types of BPOs (Broker Price Opinion) along with how they compare to a full appraisal.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Kelly: Hi, I’m Kelly McDonald. I’m the Vice President of Residential Debt here at Realty Shares and I’m super excited today to talk to you about the picking the right appraisal for your deal.
Mike: This show was sponsored by passiverental.com.
Kelly: A lot of investors, when they’re signing the deal, want to start thinking immediately about the close of the deal. One step that is often forgotten is how to get the best valuation out of the property prior to getting that financing. Especially when financing is a piece of the deal, you want to make sure that you’re getting the most bang for your buck. And a big part of that is going to be choosing the right appraisal evaluation for your particular deal.
Some of the things I would recommend that you really pay attention to are the speed to close your requirements. If you only have less than a week to go ahead and finalize your deal, there are a lot fewer options that you’re going to have versus someone who has written it up for 30 days to close.
Another piece that you’re going to want to consider is your own personal expertise. If you’ve done five or fewer deals in the neighboring area, you’re probably going to want to make sure that you have more time and a more thorough inspection than someone who’s done 30 or 40 deals in the six-block radius. Usually, those folks are going to have a very cookie-cutter idea of exactly what they’re going to do when they go into a home and they’re also going to know, dollar for dollar, of what it’s going to appraise out as.
There are a couple of different types of appraisal evaluations that the industry uses and I’ll go over a couple of those and how they can really help you determine exactly what you should get. The first thing is that I want to define what a BPO even means for you. A BPO means “broker’s price opinion.” And that means that a broker, real estate broker is sent out to go ahead and valuate the house and say, “Hey, this is exactly how much it’s going to be worth” versus a full appraisal is going to be whether you have a licensed appraiser who’s going to go and tour the property, measure it, walk in and out of every room as well as the exterior of the perimeter. And those are really the two ends of the spectrum that you’re going to be looking at.
Now, there’s what you call a BPO desktop review, which means that no one even necessarily drives out. They use their computer, the internet, tools like Google and other MLS requirements to go ahead and allow them to say, “Hey, this is what this house would likely sell for based on other sales of this home that are like that.” It’s great if you’re doing just a quick sale and you want to just get a good idea of exactly what it’s worth, not necessarily the product you want. If you’re really trying to make sure there’s an after repair value that’s associated with it because you’re going to want to make sure that someone can go in and have that visual of how that home is going to look afterward.
Same thing with the BPO drive by. Now, BPO drive by means the brokers actually going to get in their car, they’re going to drive by the property, make sure it exists, as well as look at the neighborhood and the surroundings of the actual condition of the property while they drive by. And they’re going to give their best guess as to what you’re planning on doing inside and how that relates inside the property.
These are great if you only have a week or less to go ahead and close. Often, these can be done in one-day turnaround times from a lot of different appraisal management companies. However, the drawbacks are you’re normally going to find very conservative values, as nobody wants to stamp their name and put you on the high end of the market when they don’t really know the condition of the interior of the home.
The next level up from there is what we call either the BPO internal or BPO external appraisal. They’re two separate appraisals, but it’s actually a product that’s done both by BPO, by a broker, and then also reviewed by a licensed appraiser, post that work being done just to make sure the accuracy of the comparables is there. And so it gives you just a little bit more of a robust evaluation of the house. The nice thing about this is that a lot of institutional lenders are also interested and okay with this product so it opens up your opportunities of who can do your financing to a lot more people.
And then the last one is really your full appraisal. Your full appraisal is going to allow you to absolutely get the most value out of the hard work you’ve put into doing your detailed scope of work, as well as knowing exactly what you’re getting into when you purchase. The appraiser is going to go into the home. They’re going to look at in-depth each room of the home. They’re going to measure it out and they’re going to let you know exactly what other homes in the same condition in that area have already sold for, normally within a mile and within the last 90 days.
Now, that’s absolutely something that these days, you’re looking anywhere from 7 to 15 days, depending on your market, but if you have that time, we would always recommend getting a full appraisal. And so if you have additional questions, please feel free to reach out to me at [email protected] for any additional questions that you might have. Thanks so much for your time and I hope you learned a lot.
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