What is an appraisal?
An appraisal is a professional appraiser's opinion of value. This opinion is based on pertinent research into recent market data. An appraisers' professional opinion arises out of a formal process using three common approaches to value. The three approaches are the Cost Approach, the Sales Comparison Approach, and the Income Approach. The Cost Approach determines the cost to replace the improvements, less physical deterioration and external factors, plus the land value. The Sales Comparison Approach compares the subject property to other similar, nearby properties that have recently sold. The Sales Comparison Approach to appraising is often the most accurate and best indicator of value for a residential property. As a result, it is the most widely used. The last approach, the Income Approach, is of most importance when appraising income producing properties such as rentals or non-residential spaces. This approach involves estimating what an investor would pay based on the income produced by the property.
What does an appraiser do?
An appraiser provides a professional, impartial, and unbiased opinion of market
value. Appraisers present their formal
analysis in the form of a written or an oral appraisal report.
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.
* For dispute resolution:
To contest high property taxes.
To help resolve zoning issues.
To settle an estate.
* To establish the replacement cost of insurance.
* To determine market rents.
* 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.
* To appease a government agency such as the IRS.
What is the difference between an appraisal and a home inspection?
Although an appraiser inspects the properties he/she will appraise, the appraiser is not a home inspector. The inspection that an appraiser performs is focused on the type of materials used as well as the "visible condition" that comprises the subject property. An appraiser is not required and most often, not professionally trained, in the more in-depth inspections performed by a home inspector. A home 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, interior plumbing and electrical systems; the roof, the attic, and visible insulation; walls, ceilings, floors, windows and doors; the
foundation, basement, and visible structure.
What is the difference between an Appraisal and a Comparative Market Analysis (CMA)?
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 vested interest in the
value of a home, unlike the real estate agent, whose income is tied to the
value of the home.
What does the appraisal report contain?
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.
After completing the report, what assurance is there that 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 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).
How are appraisers certified?
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.
Who do appraisers work for?
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.
Where does an appraiser get the information used to estimate value?
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. And most importantly, the appraiser gathers
general data from his or her past experience in creating appraisals for other
properties in the same market.
Why do I need a professional appraisal?
Anytime the value of your home or other real property is being
used to make a significant financial decision, an appraisal helps. If you're
selling your home, an appraisal helps you set the most appropriate value. 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. A home is
often the single, largest financial asset anybody owns. Knowing its true value
means you can the right financial decisions.
What exactly 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%. Once
equity in the home reaches 20% you can eliminate the PMI and start saving
immediately. For a detailed discussion of PMI and how to get rid of it click
here: What is PMI and how to get rid of it?
How do I get ready for the appraiser?
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.
What is ''Market Value?''
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.
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.
Which home renovations add the most to the price?
The answer to this is different depending upon the location of the
home. Different markets value amenities differently. Adding a central air
conditioner in Houston, Texas may add significant value, while putting one in a
home located in Buffalo, New York might not have much impact.