What is a Real Estate Appraisal?

An appraisal is the act of estimating or developing an opinion of value of real estate, which is generally a parcel of land and those things permanently affixed to the land.  Real property is generally considered the interests, rights and benefits of and in a parcel of land.

Most appraisals are to estimate ‘market value’ for lending purposes.  Such appraisals are generally controlled by the requirements of USPAP (Uniform Standards of Professional Appraisal Practice) and the licensing authority within the state.

    What is market value?

Market value is defined as: “The most probably price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.  Implicit in the definition is the consummation of a sale as a specified date and the passing of title from seller to buyer under conditions whereby:

• Buyer and seller are typically motivated;

• Both parties are well informed or well advised, and acting in what they consider their own best interests;

• A reasonable time is allowed for exposure in the open market;

• Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto;

• The price represents the normal consideration for the property sold unaffected by special or creative financing or sale concessions granted by anyone associated within the sale.

    Why would a person need 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.

• 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.

• If you are involved in a lawsuit.

    Who are appraisers?

Appraisers are professionals that specialize in property valuations.  State licensed appraisers have taken and passed state exams.  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 annually in order to keep the license current.

    What is the difference between an appraisal and a home inspection?

The appraiser is not a home inspector nor does he or 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 structures.

    What to expect when the appraiser arrives?

The home inspection is one of the first and most important steps in the appraisal process.  This is your best opportunity to converse with the appraiser, and notify him of features that are not readily observable by the appraiser (i.e. Hardwood flooring under carpet, etc.)  The appraiser or an assistant will contact you and make an appointment to come out and inspect the property.  While making the appointment, the appraiser may ask you for certain items that will assist him in completing the appraisal faster.  These items may include a (plat map, and or floor plan (blueprints) if readily available), list of improvements or upgrades made to the property since the last appraisal, approximate square footage, type of heating and cooling, how many bedrooms, garage type, and information regarding any homeowners association or management company to whom you pay mandatory dues.

    What to expect when the appraiser arrives? Part 2

The inspection will usually last from 15 to 60 minutes depending on the size of the house and the complexity of the floor plan.  The appraiser will take photographs of the entire exterior of the home and possibly some interior photographs depending upon the lenders requirements.  The appraiser will measure the house and other improvements to determine the gross living areas and the areas of the improvements such as basements, utility buildings, garages, carports, decks, patios and porches.  They will probably make a sketch of the house as they walk through the property labeling each room and taking notes on interior and exterior features.  The appraiser will then take this information to their office to complete this data along with other resources to make an opinion of value.

    What happens after the inspection?

When the appraiser has collected the appropriate information he will begin the report writing process.  Value is based off much of the information gathered during the inspection.  Gathering data is one of the primary roles of an appraiser.  The appraiser first collects information pertinent to the home itself.  Factors such as the location, overall condition, size of dwelling, amenities in the area, and other specified data.  General data is gathered from a number of sources; Local Multiple Listing Services provide data on recent sold homes that might be used as comparables.  Tax records and other public documents verify actual sales price in the market.   Flood zone data is gathered from FEMA data outlets, the appraiser gathers general data from their past experience in creating appraisals for other properties in the same market.

Once this information has been collected, the appraiser will apply comparable sales in a market analysis.  Adjustments will be made to reflect differences in gross living area, age, additional structures, lot size, quality of construction, room count, garages, heating and cooling, etc.

A cost approach (replacement cost) may be completed by the appraiser, which is the reasonable estimate of how much it would cost to rebuild a similar structure.  When the land value is added to the cost approach, the two figures should confirm a close range to value.

When appraising rental properties, a third approach to value is given.  The appraiser will perform a rental analysis for other similar rental properties in the area.  This information is performed in additional to the prior approaches.

    Who owns the appraisal report?

In most real estate transactions, the lender/client orders the appraisal.  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 is usually included with all of the other closing documents but is entitled to use the report for any other purposes without permission from the lender.  The exception to this rule is when a homeowner engages an appraiser directly.  The report, however, must come from the lender not the appraiser.  Professional ethics require confidentiality between the appraiser/consultant and the client which prevents the appraiser from directly giving you a copy.

    Can I use the appraisal with more than one lender?

Sometimes an appraisal can be used for more than one lender.  However, the original lender or client must give the appraiser permission in writing to release the appraisal to another lender.

    Finally, what assurance is there the value indicated is valid?

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 the 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 be 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, an appraiser must fulfill rigorous education and experienced requirements.  In addition, appraiser 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 and enforced by the Uniform Standards of Professional Appraisal Practice (USPAP).

Additional information will be provided in the very near future!