An appraisal report is an estimation leading to an opinion of value. The real estate appraiser will use a few “approaches,” typically three, to come to the estimation of market value. The Cost Approach is one of the approaches that appraisers use to find the value of a home; it involves concluding what the improvements would cost less physical degradation, plus the land value. The Sales Comparison Approach involves searching for comparable houses in close proximity and discerning value based on making a comparison of those homes to the home in question. Generally speaking, the Sales Comparison Approach is the most definite indicator of market value of a residential property. The third approach is the Income Approach, which is the most important method in appraising income producing properties – it deals with estimating what an investor would pay based on the income generated by the property.
An appraiser produces an impartial and well substantiated determination of market value, in the support of real estate exchanges. Appraisers exhibit their professional conclusions in appraisal reports.
There are many reasons to order an appraisal with the usual reason being real estate and mortgage transactions. A few other reasons for obtaining an report include:
The appraiser is not a home inspector and does not do a full home inspection. An inspection is a third-party evaluation of the accessible structure and appliances of a house, from the roof to the foundation. The usual property inspector’s report will contain an evaluation of the integrity of the house’s heating systems, 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.
To be blunt, it’s like comparing Shakespeare to reality TV. The CMA relies on indefinite trends in the market. Appraisals use comparable sales which are verifiable resources. Location and building costs are also important in an appraisal. All a CMA does is generate a “ball park figure.” Being a documented and carefully investigated opinion of value, appraisals are defensible and stand up in legal situations.
But the biggest difference is the person doing the report. Real estate agents, who may not have a true grasp of valuation methods or the entire market, create CMA’s. The appraisal is produce by a licensed, certified professional who has made a career out of valuing properties. Likewise, the agent has a vested interest in the property’s selling price – their commission – whereas the appraiser is bound by a code of ethics to collect only a previously agreed upon sum for assignments, regardless of their outcome.
Each appraisal should indicate a believable value opinion and should document the following:
For a more detailed look at the work that goes into an appraisal report click here:Sample Appraisal Report
Once the appraisal has been delivered, what assurance is there that the value conclusion is accurate?
In communicating an appraisal report, each appraiser must ensure the following:
To become a state certified appraiser, there are intense education requirements as well as practical experience that must be logged – all with the objective of gaining the skills required to provide unbiased value opinions. Plus, appraisers must stick to a strict industry code of ethics and observe national standards of practice for real estate appraisal. The guidelines for developing an appraisal and documenting its results are guaranteed by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).
Licensing and certification takes coursework, tests and experience working under a supervisor. Once licensed, he/she is required to engage in continuing education courses in order to keep the license up to date. To see the specific requirements for any state click here.
Commonly, appraisers are hired by mortgage lenders to estimate the value of a home involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters and investment decisions.
Compiling information is one of the primary tasks an appraiser does. Data can be categorized as either Specific or General. Specific data is gathered from the home itself; Location, condition, amenities, size and other specific data are documented by the appraiser during an inspection.
General data is gathered from a numerous places. To find out about recent sales to be used as “comps”, an appraiser will often use the local Multiple Listing Service. To verify actual sales prices, we look at tax records and other public documents that are usually online nowadays. Appraisers often need to report when a property is in a flood zone, and that information is retrieved from a FEMA data outlet service.
And most importantly, the appraiser gathers general data from his or her past experience in creating appraisals for other properties in the same market.
If you’re involved in some sort of financial decision and the value of your home is relevant, you’ll want a full appraisal. For those selling a home, you’ll want to determine the price that gets you the most profit but also ensures you don’t have to wait too long for a buyer to show up; an appraisal can help with that. When buying, be sure you’re not overpaying by commissioning an independent appraisal. If you’re engaged in an estate settlement or divorce, it ensures that property is divided fairly. A house is often the single, largest financial asset anybody owns. Knowing its true value is essential to making informed financial decisions.
PMI is an acronym for Private Mortgage Insurance. It protects the lender if a borrower defaults on the loan and the market price of the home is less than what the borrower still owes on the loan. Once you reach the point where your home’s equity plus the amount you’ve paid is at least 20% of your loan balance, you can have your PMI dropped.
We start with an inspection of the home. What this entails is the appraiser, after setting up an appointment, personally going through the home – recording the layout of the rooms, taking photos and documenting the general condition of its features. On the home’s interior, pick up any clutter and make sure we can access things like furnaces and water heaters. On the outside, trim any bushes so we can be free to get an accurate measurement of outside walls.
To help expedite our work as well as ensure a more accurate report, attempt if possible to have the following items:
In real estate appraising, Market Value (as opposed to Fair Market Value) is commonly defined as:
In most real estate transactions, the appraisal is ordered by the lender. Even though it’s the buyer that eventually pays for the report, the lender is the intended user. The buyer is entitled to a copy of the report – it’s usually bundled with all 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 hires an appraiser directly. In these cases, the appraiser may define 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.
A home’s location – what city it is in and even what part of that city – is key to this popular question. For example, if you live in a cold region, insulated windows can be a real plus. But they aren’t as attractive in a warm-weather climate.
As a rule, the best ROI from renovating a home comes in the kitchen. One recent study revealed that putting $20,000 into a kitchen remodel would add about $17,500 to the value of the home – or about an 88% return on investment. Bathrooms are right up there with kitchens, returning 85%. Adding bedrooms and baths can also boost the value of your home as long as your home doesn’t then become overbuilt for your neighborhood in terms of size.
FAQ Frank Olivo