What is an appraisal?

An appraisal is the summary of an analysis based on factual data and summarized with an opinion of value. This opinion of value is arrived at through a methodical process that typically uses a combination of the three approaches to value:

  • The Cost Approach: What it would cost to replace the improvements, minus physical deterioration and other factors, plus the land value.
  • The Sales Comparison Approach: Involves making a comparison to other similar, nearby properties which have recently sold. The Sales Comparison Approach is typically the most accurate and most reliable indicator of value for a residential property since it represents buyer and seller actions in the current market. In an “appraiser” inspection, the appraiser looks for the larger items for comparison purposes such as physical size of the home, number of bedrooms, bathrooms, basement, garages and so on. The most similar, recent, comparable sales are chosen and written up in a comparison grid. From there it is like “comparison shopping” with any differences adjusted. The final factor is usually the general condition of the home being appraised and where it would rank compared to similar homes in this neighborhood; average, below or above average. This is usually the final (because it is subjective) adjustment after all other factors have been adjusted. This “sales” comparison and adjusting narrows the opinion of value and one of those comparables is chosen as the most similar and therefore the best indicator of the subject’s value.
  • The Income Approach: Used in appraising income producing properties such as apartments or 2-4 unit buildings. The object is to estimate what an investor would pay based on the area’s rentals and the income produced by the property.

Reconciliation: Combining information from all approaches that are used, the appraiser is then ready to propose an estimated market value for the subject property.

Market value: What is it?

Market Value is the highest price a buyer will pay for a property and the lowest price the seller will accept in an open market under all conditions. It assumes the buyer and seller are acting prudently and with market knowledge and assuming there is no undue stimulus or influence. The buyer and seller are typically motivated with both parties well informed, reasonable open market time exposure and the price is not affected by sales incentives/concessions or creative financing.

Who needs a professional appraisal?

Whenever one is making a significant financial decision, an appraisal helps. If you’re selling your home, an appraisal helps you set the most appropriate value so you don’t sell too low or price it too high. If you’re buying, it makes sure you don’t overpay. If you’re engaged in an estate settlement or divorce, it ensures that property is divided fairly between the parties involved. A home is usually the largest financial asset anybody owns. Knowing its true value means you can make the right financial decisions.

What are some of the reasons to obtain a home appraisal?

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
  • Property Tax Appeals (when you don’t want to pay more taxes than your neighbor).
  • To provide a negotiating tool when purchasing real estate
  • To determine a reasonable price when selling real estate (Over-priced? Under-priced?)
  • To settle an estate such as death or divorce (a fair price for everyone involved).
  • To establish the replacement cost for insurance purposes (over- or under-insured?)
  • To protect your rights in a condemnation case (when they offer too little for your house).
  • When a government agency such as the IRS requires it. You can fight them!
  • Lawsuits or disputes: Protect your interests.
Are appraisers licensed or certified?

Regulations regarding licensing and certification of Real Estate Appraisers vary from state to state. 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. It is a very highly regulated business with a lot of seemingly cumbersome regulations because of the large economic effects it can have on lenders and borrowers. A home is the largest single lifetime purchase for most people. The intent of these regulations is to protect both parties in these large financial transactions.

Is there a difference between an appraisal and a home inspection?

APPRAISALS ARE NOT HOME INSPECTIONS. We DO, however, recommend them VERY HIGHLY on a home purchase. Home inspections by a licensed inspector just about always pay for themselves and then some.

The appraiser is not trained to detect and disclose the condition of mechanical, electrical, structural, roofing of plumbing systems. An appraisal is DIFFERENT from a home inspection. Appraisals are performed for the lender to facilitate a loan. Home inspections are performed for the buyer/borrower to provide 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.

Used car purchases often have inspections. Why NOT on a more expensive asset costing dramatically more? It usually results in a buyer’s peace of mind, just about always pays for itself and gives the buyer negotiating leverage.

The appraiser is not a building contractor, engineer environmental expert or licensed home inspector. The appraiser is not qualified to observe or report on physical or environmental items that are not easily visible. Anyone having concerns regarding structural, mechanical, infestation, contamination or other issues about the subject property is urged to consult an expert in the appropriate field. The appraiser makes no representations or warranties of any kind with respect to any such items that are not readily observable.

The appraiser is not a home inspector nor does he/she do a complete home inspection. In an “appraiser” inspection, the appraiser looks for the larger items for comparison purposes such as physical size of the home, number of bedrooms, bathrooms, basement, garages and so on.

Is there a difference between an Appraisal and a Comparative Market Analysis (CMA)?

An appraiser, as the disinterested third party, provides a professional, unbiased opinion of market value, to be used in making real estate decisions. Appraisers present their formal analysis in appraisal reports. A realtor’s market survey or CMA is much less detailed and COULD be biased by the realtor’s objective or potential commission. They are usually NOT a disinterested third party. An appraisal delivers a defensible and carefully documented opinion of value.

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 rather than selling them. Further, the appraiser is an independent voice, with no vested interest in the value of a home, unlike the real estate agent, whose income is tied to the value of the home.

What is in the appraisal report?

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.
  • The scope of work used to complete the assignment.
Who actually owns the appraisal report?

In most real estate transactions, the appraisal is ordered by the lender. While the home buyer 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 home buyer 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 home owner 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 home owner can use the appraisal for any purpose.

What is the source of appraisal information?

Gathering data is maybe the most time consuming activities of an appraiser. Data can be divided into Subject and Market. Subject data is gathered from the home itself. Location, condition, amenities, size and other specific data are gathered by the appraiser during an inspection.

Market 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 providers. Appraisers also gather general data from his or her past experience in creating appraisals for other properties in the same market.

Why are appraised values valid?

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).

Individual states also add their own regulations to these national standards and also have their own regulatory agencies.

What can I do to get ready for the appraiser?

The first step in most appraisals is the home inspection. 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 list of recent updates (with the year they done) to the home.
Which home renovations have the best dollar returns?

The answer to this is different depending upon the location of the home. Different markets value amenities differently. Adding a central air conditioner in Tampa, Florida may add significant value, while putting one in a home located in Chicago, Illinois might not have much impact.

As a rule, the most value returned from renovating a home comes in the kitchen. According to one national survey, kitchen remodels returned an average of 75% of the investment. In other words, a $10,000 kitchen remodeling project would add approximately $7,500 to the value of the home. Bathrooms were second, returning 70%. Finishing a basement produces mixed results. A finished basement in a 1,000 square foot often increases the value of the home more than in a 3,000 square floor home that doesn’t really need more living space. Garages have a very good returning value of 65% of cost and much more in urban areas where parking is scarce. Fireplaces have very mixed results as some people love them and are willing to pay more while others see them as a virtually useless decoration

What is PMI and how can I get rid of it?

PMI stands for Private Mortgage Insurance. It insures a lender against loss on homes purchased with a down-payment of less than 20%. When equity in the home reaches 20% you can eliminate the PMI and your payment goes down.