How do appraisals work when buying a home?
Answer:
If you are buying with a mortgage they likely will require an appraisal. I NEVER buy without an appraisal unless I am comfortable with the market opportunities and I have researched the market values to be sure I am not paying too much (I am also a licensed real estate broker and possess info that the general public will not easily access). Are you buying thru a broker? They should be able to tell you if the price is a steal, a deal or at market value at the price you are paying.
I assisted an elderly couple several years back in buying a "retirement" home, they took my analysis for free and bought it thru me. That was 7 yrs back and today it is worth a good bit more than they paid. It has been both a great home for their retirement and an asset that has also appreciated in value.
If you sell in under 12 months and 1 day you will pay taxes at your normal tax rate. If held over that the cap gain rate is 15%, however if you move into it and live there 2 yrs the cap gain tax exemption for the homestead applies and you can exempt $500,000 profit as a married couple or $250,000 as a single person. Even this has a cost for selling too soon: higher taxes.
Something to consider: if it sounds too good to be true, it is. Beware, if the property WAS worth more and they sold for less, paid you to take it, something is not adding up. The southern CA market has been good but is now softening, so be careful. You may have to hold this property 3-5 yrs for it to come back to break even or there may be something they failed to disclose and they'll skip town after closing leaving you with no recourse for suit. You should also take an owners title policy have the closing agent explain what that does for you and the cost.
As for the appraisal. you need to get an appraisal before you buy especailly if it needs rehab, and have them give you an after rehad valuation at the same time. Evaluate the cost to get it from today to the future value. The "deal" today may be your undoing tomorrow if you have too much in it. And my experience is that buyers always underestimate the real cost to rehab properties. so proceed with caution. The purpose of the appraisal is to verify that the contract price is supported by community sales. If not then adjustments to the value are needed. If teh contract price is higher than the appraisal value youhave a problem with the lender and seller. If higher than the contract price you have equity. You want a true appraisal, not one based upon your relationship with the lender. Never use a refinance appraisal. They usually are valued too high and are based partly upon trying to accomadate a client with a second mortgage.
Other considerations will be the cost to finance, cost to rehab, HVAC is defective, roof condition, costs to sell. What ever issues that caused the sellers to sell, if uncorrected will also be faced by you to be corrected.
There are no free lunches.
Random thoughts:
Speculating on homes is risky business, for two reasons. One is they aren't liquid - a stock can be bought and sold in minutes. Not so for a house.The second is that buying and selling a house incurs lots of fees.
If you are borrowing any money, your lender will demand an appraisal. If they don't, you are dealing with an incompetent or crooked lender. It will cost a few hundred bucks, which may be added on to your loan. They will assess the current value of the house. They will not make recommendations on whether that value will change.
The real estate market in Los Angeles is soft (heading downward) for the first time in almost a decade. After watching the value of my house double twice in 7 years, things are steady. I'm not a forecaster, but if you do this, you are buying into a falling market.
That said, study hard, ask a billion questions. That won't be enough, but good luck.
You are not prepared to make a profit on this home.
1. You don't know the ARV or After Repair Value.
You should have a good idea of this figure before you make an offer on a rehab. If not, how do you budget for repairs, resale costs and make a profit.
2. A 6 month Flip.
If you were serious about selling for a profit you would already know that by holding a property for a year you pay at the long term capital gains rate rather than the short term income rate. In addition, lenders are hesistant to finance resales under a year.
Anyway. you need a Realtor, familiar with your area, to help you and if you want to make money, be prepared to commit to an agent who will commit to working for your interests.
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