"Under the Hood"
Frequent Asked Questions (FAQ)
What is an appraisal?
What does an appraiser do?
Why would a person need a home appraisal?
What is the difference between an appraisal and a home inspection?
What is the difference between an Appraisal and a Comparative Market Analysis (CMA)?
What does the appraisal report contain?
After completing the report, what assurance is there that the value indicated is valid?
How are appraisers certified?
Who do appraisers work for?
Where does an appraiser get the information used to estimate value?
Why do I need a professional appraisal?
What exactly is PMI and how can I get rid of it?
How do I get ready for the appraiser?
What is ''Market Value?''
Who Actually Owns the Appraisal Report?
Which home renovations add the most to the price?
What is an appraisal? Back to top
An appraisal is a process leading to an opinion of value. This opinion is arrived at through a formal process that typically uses three 'common approaches to value. The first is the Cost Approach: what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value? The most likely for single family properties is the Sales Comparison Approach. This involves comparing the subject property to other similar, nearby recently sold properties. The third approach is the Income Approach which is of most importance in appraising income producing properties. It involves estimating what an investor would pay for the property based on the property's revenue and income streams. For a more detailed description of the appraisal process click here: What is an appraisal?
What does an appraiser do? Back to top
An appraiser provides a professional, unbiased opinion of market value which is used to make educated real estate decisions. Appraisers present their formal analysis in appraisal reports.
Why would a person need a home appraisal? Back to top
There are several reasons to obtain an appraisal. The most common is supporting real estate and mortgage transactions. Some other reasons include:
l obtaining a loan.
l Lowering your tax burden.
l Establishing the replacement cost of the dwelling for insurance purposes.
l Contesting high property taxes.
l Settling an estate.
l Providing a negotiating tool when purchasing real estate.
l Determining a reasonable price when selling real estate.
l Protecting your rights in a condemnation case.
l Because a government agency such as the IRS requires it.
l If you are involved in a lawsuit.
For more details on when you might need an appraisal click here: When to get an Appraisal
What is the difference between an appraisal and a home inspection? Back to top
The appraiser is not a home inspector nor does he/she complete a home inspection. Whereas an appraisal presents an opinion of market value, a home inspection is an evaluation of the structure and mechanical systems of a house, from the roof to the foundation. The standard home inspector's report includes 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 structure.
What is the difference between an Appraisal and a Comparative Market Analysis (CMA)? Back to top
Simply put, the difference is night and day. Whereas the CMA relies on vague market trends, an appraisal relies on specific, verifiable comparable sales. In addition, the appraisal looks at other factors like condition, location and construction costs. While 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. They might also have a vested interest in the property. The appraisal is created by an independent, licensed professional who has made a career out of valuing properties.
What does the appraisal report contain? Back to top
Each report must reflect a credible estimate of value and must identify the following:
l the client and other intended users.
l The intended use of the report.
l The purpose of the assignment.
l The type of value reported and the definition of the value reported.
l The effective date of the appraiser's opinions and conclusions.
l Relevant property characteristics, including location attributes, physical attributes, legal attributes, economic attributes, the real property interest being valued, and non-real estate items included in the appraisal such as personal property, trade fixtures and intangible items.
l All known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, and other items of a similar nature.
l Division of interest, such as fractional interest, physical segment and partial holding.
l The scope of work used to complete the assignment.
After completing the report, what assurance is there that the value indicated is valid? Back to top
In communicating an appraisal report, each appraiser must ensure the following:
l that the information analysis utilized in the appraisal was appropriate.
l That significant errors of omission or commission were not committed individually or collectively.
l That appraisal services were not rendered in a careless or negligent manner.
l That a credible, supportable appraisal report was communicated.
Most states require that real estate appraisers be state licensed or certified. State licensed or certified appraisers are 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? Back to top
Regulations regarding licensing and certification of real estate appraisers vary from state to state but usually conform to national standards. In any case, licensing and certification are most often associated with numerous hours of coursework, tests and practical experience. Once an appraiser is licensed, he or she is required to take continuing education courses. To see the specific requirements for any state click here.
Who do appraisers work for? Back to top
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? Back to top
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. 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? Back to top
Any time the value of your home or other real property is being used to make a significant financial decision, an appraisal provides invaluable assistance. If you're selling your home, an appraisal helps you establish a fair market value. If you're buying, it makes sure you don't overpay. If you're engaged in an estate settlement or divorce, it ensures a fair property value. 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? Back to top
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? Back to top
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, confirm all aspects of the home's general condition and take several photos of your house for use 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 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.
l A survey of the house and property.
l A deed or title report showing the legal description.
l A recent tax bill.
l A list of personal property to be sold with the house if applicable.
l A copy of the original plans.
What is ''Market Value?'' Back to top
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. This assumes the buyer and seller are each acting prudently, knowledgeably and 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? Back to top
In most real estate transactions, the appraisal is ordered by the lender. While the home buyer usually pays for the report as part of the closing costs, the lender retains the right to use the report or any information contained therein. The home buyer is entitled to a copy of the report and it's usually included with all of the other closing documents. However, the buyer 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, estate planning, tax challenges, etc. If not stipulated otherwise, the homeowner can use the appraisal for any purpose.
Which home renovations add the most to the price? Back to top
The answer to this differs depending upon the location of the property. Different markets value amenities differently. Adding a central air conditioner in Houston, Texas may add significant value whereas putting one in a home located in Buffalo, New York might not have the equivalent market impact.
As a rule, the most value returned from renovating a home comes in the kitchen. According to one national survey, kitchen remodeling returns an average of 88% of the investment. In other words, a $10,000 kitchen remodeling project would add approximately $8,800 to the value of the home. Bathrooms were second, returning 85%.