Appraisals

[David Greyshock]

I have been looking at turnkey investment companies lately for out of state investing.  One of the common themes is that there may be a discrepancy between the asking price and the appraised value(possibly higher)  Sometimes, this may push a 20% down payment into a 30-40% down payment because a bank will only lend 80% of the appraised value.  

My question is:

If a turnkey company actually spends a significant amount of money to replace the high ticket items, e.g. AC, furnace, roof, water heater, etc., why wouldn't an appraiser be able to account for that when using comparable sales that haven't had significant capex items done? A house built in 1980 with brand new EVERYTHING should be worth more than the same house with original mechanicals.

If big ticket items are essentially brand new, why shouldn't it be accounted for during the appraisal?

I understand the difference here between SFR and apartments, but still, a higher down payment in these cases may mean the difference between buying 1 SFR and 2.

[Mark Vejnar]

@David Greyshock

The hard and fast rules of the stock market will only serve to benefit you here. 

I think what we're talking about is the law of diminishing returns. The bulk of any home's value is derived from its location. The surrounding land use, housing trends, level of upkeep, etc., impact the intrinsic value of a given location. Subsequent to location are age, style, and condition - not necessarily in that order. Once a firm understanding of the structure and its place in the local economy have been determined we can then proceed to approaches to value. 

It is possible for a house to be completely renovated and for its value to remain constant when performing a sales comparison approach. If there are no renovated comps, there is no way to calculate, from a sales comparison perspective, how much the market is willing to pay for the renovations performed. However, we can observe that renovated homes may sell faster, which can this render a time adjustment - but time adjustments are tricky requiring lengthy explanations in the addenda. 

For turnkey you will be far better served by disrgarding (or minimizing) sales comparisons and focusing instead on income and cost. 

Renovations that are already complete increase your NOI as you don't have to pay for them moving forward. Obviously you'll have maintainance expenses moving forward, but they should be less on a renovated structure.

Renovations also reset the clock on remaining economic life - fundamental tony he cost approach. This changes depreciation in your favor - talk to your real estate focused CPA. Get a detailed list of the renovations for your records to justify the calculations. Also ask the appraiser to show you what record of renovations is in the work file (all appraisals have a "work-file" that is maintained by the appraiser) and make sure all work was considered from a cost and income perspective. 

Therefore, the big ticket items should be accounted for, but not necessarily from a sales comparison standpoint.