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June 22 2022

How to Determine the Value of a Home You Want to Buy or Sell – 3 Appraisal Types

Determining the value of a home can be difficult. Whether making an offer or deciding on a selling price, there are 3 basic appraisal types used for making offers when buying or deciding on a list price when selling.

Comparison Appraisal

The term “Comp” may be a familiar term when talking about real estate. A Comp is a “Comparable” home price. When an appraiser uses the comparison method, also known as a Sales Comparison Appraisal, the appraiser will take the SOLD price of tree homes within a 1 mile radius and that have sold within the past 6 months. 

Therefore, when purchasing or buying, you can do a similar search to determine your purchase or selling budget for the home that interests you. That is the baseline, and from there, you can determine if the market is rising or lowering and you can make an educated decision with your realtor on how much to list or how much to offer on the home in question.

Cost Appraisal

A Cost Appraisal refers to the current cost value it would take to replace the home. Think of framing, roofing, drywall, paint, any material and labor cost to replace what exists. Cost appraisals typically occur during construction projects whether it’s a new build or a renovation, because there’s an actual cost to what’s being done to the home. Real Property has a ton of helpful information when it comes to construction cost and budgeting to check out.

Income Appraisal

In markets such as Colorado Springs, CO, Income Appraisals are good to understand because they deal with Investment Properties, often known as Rental Properties. There are two ways to obtain an income appraisal. The first option is to already own the home, and the existing rent roll sets the precedent of what the revenue stream amounts to. The other option is to have an appraiser evaluate the property and set, or appraise, the monthly income that that property should draw. Once the monthly revenue stream has been established, then an investment loan, such as a DSCR loan, can be obtained to finance the investment property.

DSCR Loans in Colorado and other States

DSCR stands for Debt Service Coverage Ratio. A DSCR loan allows for loan approval based on the value of the rental property rather than the income responsibility of the borrower. Even though a DSCR loan is a No Income Loan, it still qualifies based on the revenue stream income generated from the property. Here’s an example:

$300,000 home purchase to be used under a DSCR loan

80% LTV requires $60,000 down payment

$240,000 DSCR Loan at approx 6.75% would require an Income Appraisal of at least $1,557 in monthly revenue.

In this situation, if the property only appraises at $1,350 in monthly revenue, then the buyer would have to put down an additional $32,000 to get the monthly mortgage at or under $1,350/mo. An added note: Debt Service loans also require proof of monthly reserves, often 6 months worth, which prove the ability to cover the mortgage payment in case the property goes un-rented for a period of time. On a special note, I have seen reserve requirements drop to 3 months on rare occasions.

Approaching Home Buying or Selling from a Healthy Perspective

The Real Estate Market shifted a couple months ago and some rookie Realtors and inexperienced sellers have panicked. Before that, many buyers panic bought, which rapidly inflated home prices. Whether buying or selling, knowing the value of a home is important to making a wise investment decision. Whatever your situation, there’s a Juicy Solution waiting for you that fits your needs. Take a look around the website, or checkout my new brokerage with Freedom Home Loans for genuine mortgage help.

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