Property

Real Estate Appraisal

Real estate appraisal – is that the real one?

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Real estate appraisal or property valuation is the process of determining the value of a property on the basis of the highest and the best use of real property (which basically translates into determining the fair market value of that property). The person who performs this real estate appraisal inspection and evaluation is called the real estate appraiser or property valuation surveyor.

The value as determined by a real estate appraisal is the fair market value. The real estate appraisal is done using various methods and the real estate appraiser evaluates different properties differently. The real estate appraisal might assign 2 different values to the same property (As-repaired value and as-is value) and again the same/similar property might be assigned different values in a residential zone and a commercial zone. However, the value assigned as a result of real estate appraisal might not be the value that a real estate investor would consider when evaluating the property for investment. In fact, a real estate investor might completely ignore the value that results from the real estate appraisal process.

A good real estate investor would evaluate the property on the basis of any developments going on in the region. So real estate appraisal as done by a real estate investor would come up with the value that the real estate investor can get out of the property by buying it at a low price and selling it at a much higher price (as in the present). Similarly, real estate investor could do his own real estate appraisal for the expected value of the property in, say 2 years time or in 5 years time. Again, a real estate investor might conduct his real estate appraisal based on what value he/she can create by investing an additional amount of money in the property i.e. a real estate investor might decide on buying a run-down property which needs repair (which no one likes) and complete repairs in order to increase the value of the property (the value that the real estate investor would get by selling it in the market).

So, here the meaning of real estate appraisal changes completely (and can be very different from the value that real estate appraiser would come out with if the real estate appraiser conducted a real estate the normal inspection and institutional appraisal on the property).

A real estate investor will generally base his investment decision on this real estate appraisal that he does himself (or gets done through someone whom he trusts or works with). So, can we then make the determination that a real estate appraisal is really the true value of the property?

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The Real Estate Loan

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Real estate loan: Understanding the concept

A real estate loan is the money with which many people buy their homes. Real estate loans have been instrumental in bringing joy to people by making that unaffordable house affordable. Some real estate investors also make use of real estate loans for buying properties. However, a real estate loan is not free money and anyone who buys real estate or plans to buy real estate using a real estate loan must understand the concept of the real estate loan very clearly.

A real estate loan (also known as mortgage) is the money that you borrow from someone (i.e. a financial institution or mortgage lender) for the purpose of buying a property. The real estate loan generally covers a part of your purchase price and the remaining portion has to be paid by you out-of-pocket, i.e. for down payment and closing costs. The amount that you have to pay as down payment is dependent on a number of factors and you can generally reduce it to even 5% by going for mortgage insurance.

FHA and VA loans (i.e. mortgage insurances through FHA and a guarantee of veterans' mortgage through the VA) reduce the down payment requirement on a real estate loan even further. Whatever you borrow from the mortgage lender in the form of a real estate loan needs to be paid back to the mortgage lender over a period of time (and, of course, you will also need to pay the required interest on that loan). The term of your real estate loan and the prevailing market rate will determine the amount of interest you pay for your real estate loan.

Generally, you are required to pay back the real estate loan in the form of monthly installments which are composed of both interest and principal portions of your real estate loan, plus property taxes and homeowner's insurance in the majority of cases. Also, there are various types of real estate loans e.g. fixed interest rate loans and adjustable interest rate loans. So depending on what type of real estate loan you apply for, your monthly payments might either remain constant (fixed rate) for the full term of the loan or adjusted periodically (adjustable rate) on the basis of a financial index.

Besides that, some other costs are also associated with real estate loans, inspection costs, title charges and attorney fees, among others. Moreover, in case the property needs some repairs, there will be costs associated with that also. Again, there is stamp duty and other taxes that you need to pay, so really, you need to understand the concept of real estate loans and the related costs clearly before you actually make application for the real estate loan. And understanding these concepts is really not that difficult as long as they are clearly explained by your mortgage loan officer.