Frequently Asked Questions about Appraising
What is an appraisal?
What does an appraiser do?
When is a home appraisal needed?
What is the difference between an appraisal and home inspection?
Difference between an appraisal and Comparative Market Analysis (CMA)?
What does an appraisal report contain?
How to know that an appraisal report is accurate?
How are appraisers certified?
Who do appraisers work for?
How does an appraiser estimate value?
How to prepare for an appraiser?
What is market value?
Who owns the appraisal report?
What is the process of an appraisal?
An appraisal is a thought process leading to an opinion of value. This opinion or estimate is arrived at through a formal process that typically uses the three “common approaches to value”. They are the Cost Approach – which is what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value. There is the Sales Comparison Approach – which involves making a comparison to other similar, nearby properties which have recently sold. The Sales Comparison Approach is normally the most accurate and best indicator of value for a residential property. The third approach is the Income Approach, which is of most importance in appraising income producing properties – it involves estimating what an investor would pay based on the income produced by the property.
An appraiser provides a professional, unbiased opinion of market value, to be used in making real estate decisions. Appraisers present their formal analysis in appraisal reports.
There are many reasons to obtain an appraisal with the most common reason being real estate and mortgage transactions. Other reasons for ordering an appraisal include:
• To obtain a loan
• To lower your tax burden
• To establish the replacement cost of insurance
• To contest high property taxes
• To settle an estate
• To provide a negotiating tool when purchasing real estate
• To determine a reasonable price when selling real estate
• To protect your rights in a condemnation case
• Because a government agency such as the IRS requires it
• If you are involved in a lawsuit
The appraiser is not a home inspector nor does he/she do a complete home inspection. An inspection is a third-party evaluation of the accessible structure and mechanical systems of a house, from the roof to the foundation. The standard home inspector’s report will include an evaluation of the condition of the home’s heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.
Simply put, the difference is night and day. The CMA relies on vague market trends. The appraisal relies on specific, verifiable comparable sales. In addition, the appraisal looks at other factors like condition, location and construction costs. A CMA delivers a “ball park figure.” An appraisal delivers a defensible and carefully documented opinion of value.
But the biggest difference is the person creating the report. A CMA is created by a real estate agent who may or may not have a true grasp of the market or valuation concepts. The appraisal is created by a licensed, certified professional who has made a career out of valuing properties. Further, the appraiser is an independent voice, with no stake in the value of a home, unlike the real estate agent, whose income is tied to the value of the home.
Each report must reflect a credible estimate of value and must identify the following:
• The client and other intended users
• The intended use of the report
• The purpose of the assignment
• The type of value reported and the definition of the value reported
• The effective date of the appraiser’s opinions and conclusions
• Relevant property characteristics, including location attributes, physical attributes, legal attributes, economic attributes, the real property interest valued, and Non real estate items included in the appraisal, such as personal property, including trade fixtures and intangible items
• All known: easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, and other items of a similar nature
• Division of interest, such as fractional interest, physical segment and partial holding
• The scope of work used to complete the assignment
In communicating an appraisal report, each appraiser must ensure the following:
• That the information analysis utilized in the appraisal was appropriate.
• That significant errors of omission or commission were not committed individually or collectively.
• That appraisal services were not rendered in a careless or negligent manner.
• That a credible, supportable appraisal report was communicated
Most states require that real estate appraisers are state licensed or certified. The state licensed or certified appraiser is trained to render an unbiased opinion based upon extensive education and experience requirements. To become licensed or certified, appraisers must fulfill rigorous education and experience requirements. In addition, appraisers must abide by a strict industry code of ethics and comply with national standards of practice for real estate appraisal. The rules for developing an appraisal and reporting its results are insured by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).
Regulations regarding licensing and certification of Real Estate Appraisers vary from state to state. However, licensing and certification is most often associated with many hours of coursework, tests and practical experience. Once an appraiser is licensed, he or she is required to take continuing education courses in order to keep the license current.
Typically, appraisers are employed by lenders to estimate the value of real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters and investment decisions.
Gathering data is one of the primary roles of an appraiser. Data can be divided into Specific and General. Specific data is gathered from the home itself. Location, condition, amenities, size and other specific data are gathered by the appraiser during an inspection.
General data is gathered from a number of sources. Local Multiple Listing Services (MLS) provide data on recently sold homes that might be used as comparables. Tax records and other public documents verify actual sales prices in a market. Flood zone data is gathered from FEMA data outlets, such as a la mode’s InterFlood product. Most importantly, the appraiser gathers general data from his or her past experience in creating appraisals for other properties in the same market.
The first step in most appraisals is the home inspection. During this process, the appraiser will come to your home and measure it, determine the layout of the rooms inside, confirm all aspects of the home’s general condition, and take several photos of your house for inclusion in the report. The best thing you can do to help is make sure the appraiser has easy access to the exterior of the house. Trim any bushes and move any items that would make it difficult to measure the structure. On the inside, make sure that the appraiser can easily access items like furnaces and water heaters.
The following Items, if available, will help your appraiser to provide a more accurate appraisal in a shorter period of time:
• A survey of the house and property
• A deed or title report showing the legal description
• A recent tax bill
• A list of personal property to be sold with the house if applicable
• A copy of the original plans
Market value or fair market value is the most probable price that a property should bring (will sell for) in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised; (3) a reasonable time is allowed for exposure to the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
In most real estate transactions, the appraisal is ordered by the lender. While the homebuyer pays for the report as part of the closing costs, the lender retains the right to use the report or any information contained within. The homebuyer is entitled to a copy of the report – it’s usually included with all of the other closing documents – but is not entitled to use the report for any other purpose without permission from the lender.
The exception to this rule is when a homeowner engages an appraiser directly. In these cases, the appraiser may stipulate how the appraisal can be used for PMI removal, or estate planning or tax challenges, for example. If not stipulated otherwise, the homeowner can use the appraisal for any purpose.
An appraisal is an unbiased estimate of what a buyer might expect to pay – or a seller receives – for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser’s duty is to inspect the property being appraised to ascertain the true status of that property. The appraiser must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features – or defects – that would affect the value of the house.
Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit of value. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are “comparable” to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.
In the case of income producing properties – rental houses for example – the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or “bidding wars” that may adjust the final price up or down. The appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money that the property is actually worth. The bottom line is an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.