What is an appraisal?
An appraisal is a professional appraiser’s opinion of value. An appraisal requires the collection and analysis of information relevant to the property; research in the appropriate market areas; and the experience, knowledge and professional judgment of the appraiser.Appraisals may be required for any type of property, and whenever real property is mortgage, taxed, insured, or sold.
The role of the appraiser is to provide unbiased and objective opinions about the value of real property. Appraisers collect data and other information regarding specific properties, analyze this data, and develop opinions of value.
A common misconception is we are Home Inspectors. We are not Home Inspectors. We are “Home Observers”. An Appraiser does not look at a home from top to bottom like an Inspector does. An appraiser’s duty is to observe the property being appraised to ascertain the true status of that property. An appraiser will investigate the structure, looking at the roofing and siding to determine the material, and the quality and condition of each. They will also look at the foundation for cracks or movement. They will look at your yard – the size, topography, landscaping, traffic and other nearby uses, either positive or negative.
Inside your home, things like the material and quality of the walls, the type of flooring and its condition, kitchen features and finishes, bathroom features and finishes, and note any defects or
damage they find. The appraiser will examine features that your house may or may not have, such as central air cooling; attached vs. detached garages and number of bays; fireplaces; decks, patios; fences or irrigations systems, just to name a few. The appraiser will examine any upgrades or renovations projects completed. If you recently remodeled a kitchen or bathroom, share this information with the appraiser. These things can often go over-looked and they can influence the value of your property.
When do you need an appraisal?
There are many reasons why you need an appraisal. The most common reasons are when you are buying, selling, or refinancing a home. Most, if not all, of these transactions include a simple line item for an appraisal. It has become an understood and accepted part of a real estate transaction. In these instances, an appraisal protects the lender or client so that the do not over pay for a property.
But is this the only reason to get an appraisal? There are many other reasons you may need an appraisal, such as Tax Challenges, PMI removal, Pre-Sale Decisions, Estate Planning, Liquidation and Divorce. Let us take a more in-depth look at a few of these reasons below.
Property Tax Challenges
One reason to get an appraisal is to contest high property taxes. Challenging the tax assessment has
become an annual ritual 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 other than: ”It wasn’t worth that much last year.” A real estate appraiser can help in these situations. These documents can carry a lot of weight when you appear before an appeals board. The investment return is east to perceived when the price of the appraisal is compared to many years of lower taxes.
A real estate appraiser can help in these situations. While it may not be economical to commission a full appraisals to lop a few hundred off your tax bill, often an appraiser can do a limited appraisal or neighborhood analysis for much less. These documents can carry a lot of weight when you appear before an appeals board.
Private Mortgage Insurance or PMI is the supplemental insurance that many lenders ask home buyers to purchase when the amount being loaned is more than 80% of the value of the home. Very often, this additional payment is folded into the monthly mortgage payment and is quickly forgotten. This is unfortunate because PMI becomes unnecessary when the remaining balance of the loan – whether through market appreciation or principal paydown – dips below this 80% level. In fact, the 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.
Many appraisers offer a specific service for home owners that believe they have met the 80% loan-to-value metric. For a nominal fee, the appraiser can provide you with a statement regarding the home value. Some will even take the next step and help you file a challenge with your mortgage company. The costs of these services are very often recovered in just a few months of not paying the PMI.
Before someone decides to sell a home, there are several decisions to be made. First and foremost: ”How much should it sell for?” But first there may be other equally important questions to ask: ”Would it be better to paint the entire house first?” ”Should I put in that third bathroom?” ”Should I complete my kitchen remodel?” Many things which we do to our houses have an effect on their value. Unfortunately, not all of them have an equal effect. While a kitchen remodel may improve the appeal of a home, it may not add nearly enough to the value to justify the expense.
Appraisers can step in and help make these decisions. Unlike a Realtor, an appraiser has no vested interest in what amount the house sells for. His fee is based on his efforts, not a percentage of the sales price. So seeking a professional appraisal can often help homeowners make the best decisions on investing in their homes and setting a fair sales price.
Estate Planning, Liquidation, or Divorce
The loss of a loved one is a difficult time in life. Likewise, a divorce can be a particularly traumatic experience. Sadly, these events are often complicated by difficult decisions regarding the disposition of an estate. Unlike many wealthy individuals, the majority of Americans do not have dedicated estate planners or executors to handle these issues. Also, in most cases, a home or other real property makes up a disproportionate share of the total estate value.
Here too, an appraiser can help. Often the first step in fairly disposing of an estate is to understand its true value. Where property is involved, the appraiser can help determine the true value. At this point, equitable arrangements can more easily be arrived at among disputing parties. Everyone walks away knowing they’ve received a fair deal.
Professional appraisers are bound to the utmost practice of fairness and objectivity through USPAP (Uniform Standards of Professional Appraisal Practice), and for members of the Appraisal Institute, the Professional Code of Ethics. Confidentially is a major requirement, as well. In no circumstance is an appraiser allowed to divulge information to either divorcing party or their attorney before the final valuation is made.
There are other uses for real estate appraisals. The highly-trained individuals behind these services are always looking for ways to put their expertise to work for home owners and the people who support them.
Property Valuation Methods
In cost approach, the market value for the property is equal to the cost of land plus cost of construction, less depreciation. It produces the most accurate market value when the property is new. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
Elements of Comparison are the characteristics of properties that help explain differences in prices paid for real estate. Elements of Comparison include items such as; location; size of structure or site; quality and condition of finishes; physical features (garages, decks, fireplaces, etc.); count of rooms, bedrooms and bathrooms; financing and floor plan, to name a few.
Because no two properties are exactly alike, the sales prices of the comparable properties must be adjusted up or down for each of the differences between the subject’s characteristics and the comparable characteristics. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property. However, only the market value of the differences is considered, not their actual cost. to arrive at the current value of those revenues over the foreseeable future.
The analysis of sales and cost data of similar properties are essential practices of this approach. This data is analyzed and capitalized to derive a market value. Capitalization is used to convert an estimate of income into an indication of value. This is done by either dividing the income estimate by an appropriate income rate or by multiplying it by an appropriate income factor.
property, the best approach for the subject property type is given the greatest weighting, with some value adjustments from the other approaches if the appraiser deems that it is warranted.
This data is reexamined to ensure the analytical techniques and logic applied has led to consistent judgments. The data is then reconciled into an opinion of value. This may be a single point estimate or value range.
It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ”bidding wars” that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money that the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.