What is an appraisal?
An appraisal is a professional appraiser's opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience and professional judgment of the appraiser. The role of the appraiser is to provide objective, impartial and unbiased opinions about the value of real property - providing assistance to those who own, manage, sell, invest in and/or lend money on the security of real estate.
At minimum, all states require appraisers to be state licensed or certified in order to provide appraisals to federally regulated lenders. Appraisers have fulfilled rigorous educational and experience requirements and must adhere to strict standards and a code of professional ethics. Qualified State Certified appraisers bring knowledge, experience, impartiality and trust to the transaction. In so doing, they help their clients make sound decisions with regard to real property.
Most appraisals are reported in writing, although in certain circumstances, an appraiser may provide an oral appraisal.
A written appraisal report generally consists of:
- A description of the property and its locale
- An analysis of the "highest and best use" of the property
- An analysis of sales of comparable properties "as near the subject property as possible"
- Information regarding current real estate activity and/or market area trends.
- Value indicated by recent sales of comparable properties
- Current cost of reproducing or replacing a building
- The value that the property's net earning power will support are the most important considerations in the valuation of real property.
In addition to residential or commercial appraisal - and depending upon an appraiser's designation and qualifications - he or she may be able to assist with the following:
- Estate planning and estate settlements
- Tax assessment review and advice
- Advice in eminent domain and condemnation property transactions
- Dispute resolution-including divorce, estate settlements, property partition suits, foreclosures, and zoning issues
- Feasibility studies
- Expert witness testimony
- Market rent and trend studies
- Cost/benefit or investment analysis; for example, what will be the financial return on remodeling
- Land utilization studies
- Supply and demand studies
The following questions would be appropriate when selecting an appraiser:
- Are you licensed or certified in the state in which you live?
- How long have you been in practice?
- What level of experience do you have in this particular market and with this type of property?
- Are you familiar with property in this neighborhood?
- What types of clients have you had (homeowners, estates, lenders, relocation companies)?
Why do I need an appraisal?
An appraisal is a valuation tool used by mortgage lenders to verify a property's worth
for prospective financing. The mortgage industry relies upon a qualified independent
real estate appraiser to guide them in their financing decisions. But is this the only reason to get an appraisal? Many homeowners, assessors' offices, attorneys, buyers and sellers utilize appraisal for a variety of needs:
Private Mortgage Insurance or PMI is the supplemental insurance that many lenders have to purchase when the amount being loaned is more than 80% of the value of the home (LTV loan to value). This additional payment is often folded into the monthly mortgage payment and is quickly forgotten. After a rise in values and/or payment to principal goes below this 80% level PMI is no longer required. United States Congress passed a law in 1998 (the Homeowners Protection Act of 1998) that requires lenders to remove the PMI payments when the loan-to-value ratio conditions have been met. An appraisal is required to determine the property's value. The costs of these services are recovered in just a few months of not paying the PMI.
PROPERTY TAX ASSESSMENTS
Challenging the tax assessment has become a necessity in many parts of the country. Unfortunately, most people go into these challenges unarmed. They may pull some information from the Internet to support their claims, but have no real basis for their claims.
A real estate appraiser can provide the accurate answers to the question of value. While it may not be economical to commission a full appraisal to save a few hundred dollars off your tax bill, often an appraiser can do a limited appraisal for much less, yet with the same conclusions and integrity. An appraisal from a qualified appraiser would be a step in the right direction in any dispute with your local tax assessor.
In times of loss, it is often difficult to think of the various steps that must be taken to resolve any outstanding monies of the deceased. An appraisal is required to establish fair market values of any real estate properties in the estate for tax filings and any presentation to multiple heirs. An appraisal is a necessity to dispose of the estate properly.
In unfortunate circumstances, such as divorce, appraisals are required so that both parties involved receive a fair and impartial value. An appraisal by a qualified independent professional third party is often required by state law to settle the divorce.
FEASIBILITY - LAND UTILIZATION STUDIES
Often appraisers are required when townships are planning certain uses of land, rezoning, implementation of housing developments, traffic infrastructure, cost benefit analysis and a whole host of projects. The appraisers' responsibility is to deliver an accurate appraisal report, a necessary response to the question of fair market value.
Confusion about the appraisal process?
Assumption: The appraised value of a property will vary, depending upon whether the appraisal is conducted for the buyer or the seller.
Fact: The appraiser has no vested interest in the outcome of the appraisal and should render services with independence, objectivity and impartiality
Assumption: Appraisers are hired only to estimate real estate property values in property sales involving mortgage-lending transactions.
Fact: Depending upon their qualifications and designations, appraisers can and do provide a variety of services, including advice for estate planning, dispute resolution, zoning and tax assessment review, and cost/benefit analysis.
Assumption: Market value should approximate replacement cost.
Fact: Market value is based on what a willing buyer likely would pay a willing seller for a particular property, with neither being under pressure to buy or sell. Replacement cost is the dollar amount required to reconstruct a property in-kind.
Assumption: Assessed value should equate to market value.
Fact: While most states support the concept that assessed value approximates estimated market value, this often is not the case. Examples include when interior remodeling has occurred and the assessor is unaware of the improvements, or when properties in the vicinity have not been reassessed for an extended period.
Assumption: Appraisers use a formula, such as a specific price per square foot, to figure out the value of a home.
Fact: Appraisers make a detailed analysis of all factors pertaining to the value of a home including its location, condition, size, proximity to facilities and recent sale prices of comparable properties in the subject market area.
Assumption: Because consumers pay for appraisals when applying for loans to purchase or refinance real estate, they own their appraisal.
Fact: The appraisal is, in fact, legally owned by the lender - unless the lender "releases its interest" in the document. However, consumers may obtain a copy of the appraisal report from their lender who had ordered the report under the Equal Credit Opportunity Act.
Assumption: In a robust economy - when the sales prices of homes in a given area are reported to be rising by a particular percentage - the value of individual properties in the area can be expected to appreciate by that same percentage.
Fact: Value appreciation of a specific property must be determined on an individualized basis, factoring in data on comparable properties and other relevant considerations. This is true in good times as well as in bad.
Assumption: Consumers need not be concerned with what is in the appraisal document so long as it satisfies the needs of their lending institution.
Fact: Only if consumers read a copy of their appraisal can they double-check its accuracy and question the result. Also, it makes a valuable record for future reference, containing useful and often revealing information - including the legal and physical description of the property, square footage measurements,a list of comparable properties in the neighborhood, neighborhood description and a narrative of current real-estate activity and/or market trends in the vicinity.
Assumption: An Appraisal is the same as a home inspection.
Fact: An Appraisal does not serve the same purpose as an inspection. The Appraiser forms an opinion of value in the Appraisal process and resulting report. A home inspector determines the condition of the home and its major components and reports these findings.
Assumption: You generally can tell what a property is worth simply by looking at the outside.
Fact: Property value is determined by a number of factors, including location, condition, improvements, amenities, and market trends.