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IWP!, flagship product is Chicago's premiere real estate Investment
magazine. Entitled Invest With Passion!, it is the tool for investors and professionals in the
Mid-West. The publication seeks to grow it's market share by providing
powerful information designed to build the reader both as an investor and a
person.
Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
networking opportunities for the real estate investor has been long neglected.
No More!
The time is now and the momentum is building.
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SUBJECT TO APPRAISAL
By Freddie
Taylor
There are various types
of real estate appraisals an investor needs from time to time. Today, we
will be discussing “Subject To” appraisals.
What is a “Subject to”
appraisal?
“Subject to” appraisals
are sometimes referred to as after-repair value, ARV, appraisals. This is
because the value of the appraisal is given as if the repairs have been
made on the property. This is a hypothetical condition or future value
appraisal because the value is rendered for some time in the future once
these conditions have been met. Why get “Subject to” appraisals & who
needs them?
“Subject to” appraisals
are most commonly used by rehabbers and developers seeking Hard Money or
Rehabilitation loans that provide acquisition and renovation cost.
Simply, a lender gives the investor enough money to purchase a property
and repair it, all in one loan.
The typical “Rehab Loan”
provides 60% - 85% of the after-repair value of the property depending on
the lender's requirements. For example, I appraise for a rehab lender
that offers 70% Loan to Value (LTV) on the ARV of the property.
Breakdown: Suppose the
ARV on a property is $200,000. As long as you can purchase and repair
this property for $140,000 or less, they would lend you the money for this
project. $200,000 x 70% = $140,000. The $60,000 spread represents the
lender’s risk tolerance for borrowed funds and the potential profit margin
for the borrower.
The ARV of a property is
determined via a “subject to” appraisal. There are not many surface
differences between a “subject to” appraisal and a typical “as-is”
appraisal, where the property is appraised as it appears in its current
condition. You should expect to pay a little more than a normal appraisal
due to the different requirements and time sensitivity involved in a rehab
loan.
The Inspection: There
isn't much difference in comparison to a normal “as-is” inspection. The
appraiser will measure the exterior of the property, take pictures, and
note the property's environment and amenities. Inside is where the
differences will be noticed. The appraiser is not concerned with the
current condition of the property. Although interior pictures will be
taken, the “subject to” appraisal is based on the hypothetical condition
of the property being repaired. This is done via a repair list.
The Repair List: The
repair list is the heart and soul of a “subject to” appraisal report. The
appraisal cannot be completed unless the repair list is completed by the
borrower and submitted to the appraiser. This list will be reproduced and
inserted into the appraisal to document the hypothetical improvements on
which the future value of the property will be based.
The appraiser will use
this list to complete the appraisal report. For example, say a property
has vinyl tile in the kitchen and bath. The appraiser will ignore the
current materials and use what is in the repair list which says that
ceramic tile will be placed in the kitchen and bath. Don't get
intimidated by the thought of generating a repair list. The more detailed
the better, but you don't have to break everything down by unit cost. A
laundry list similar to the one displayed in Figure 1 will suffice.
The purpose of the repair
list is to inform the appraiser and the interested parties to the scope of
work to be completed on the property, the materials list, and the total
cost of the project.
The specific layout and
design functions of your project will be sought out by the appraiser
during the inspection and interview process where the appraiser will ask
questions on layout, materials, and design. (If the project is new
construction, the plans are required.)
The Comps: Comparable
properties help the appraiser determine and justify market value. In the
“subject to” appraisal, the comparables will be selected as if the repairs
in the repair list were completed. If the property would be a total gut
rehab and the comps selected to determine value will reflect this.
Imagine that average
condition brick bungalows sold between $140,000 - $160,000; total rehabs
sold for $190,000 - $210,000; and the property you are buying today may be
worth $90,000. Yet, the comparables the appraiser selects are between
$190,000 - $210,000. Why? Because the appraisal is being completed
“subject to” the completion of the list of repairs. If these repairs were
finished today, the property would be worth what? $200,000 in our
example, because the value of the property is based on the comparables
that were rehabbed.
What to remember?
“Subject to” appraisals
deliver the after-repair value of property. This value is based on the
completion of a repair list provided by the borrower of the loan and to be
completed at a future date. The comparables selected to support this
future value will be selected based upon the hypothetical completion of
all repairs and design plans given to the appraiser. So if you are, or
intend to be a rehabber or developer, then, yes, you should be familiar
with “subject to” appraisals because you may need a few in your future.
Invest With Passion!
***********************************************************
Freddie E. Taylor, MBA is
a practicing Certified Residential Real Estate Appraiser in the Metro
Chicago area for over five years, Mr. Taylor enjoys the business and
services he is able to bring to the market. For more information about
appraisals or to contact Mr. Taylor, visit his website
www.PickingComps.com.
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