APPRAISALS - 101
Learn all about it
What is an appraisal?
An appraisal is a thought process leading to an opinion of value. This opinion or estimate is arrived at through a formal process that typically uses the three ''common approaches to value''. They are the Cost Approach - which is what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value. There is the Sales Comparison Approach - which involves making a comparison to other similar, nearby properties which have recently sold. The Sales Comparison Approach is normally the most accurate and best indicator of value for a residential property. 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 based on the income produced by the property.
What does an appraiser do?
An appraiser provides a professional, unbiased opinion of market value, to be used in making real estate decisions. Appraisers present their formal analysis in appraisal reports.
Why would a person need a home appraisal?
There are many reasons to obtain an appraisal with the most common being real estate and mortgage transactions. Other reasons for ordering an appraisal include:
- To establish the value at a specific point in time for the dissolution and settlement of an estate
- To establish the replacement cost of insurance.
- To contest high property taxes.
- To establish the value for a trust
- To establish value of the asset for a divorce
- 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.
- Because a government agency such as the IRS requires it
- To lower your tax burden
- If you are involved in a lawsuit
What is the difference between an appraisal and a home inspection?
The appraiser is not a home inspector nor does he/she do a complete home inspection. 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 (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) or Broker's Price Opinion (BPO)?
Simply put, the difference is night and day. A CMA or BPO 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 commission is tied to the value of the home. Do you think a conflict of interest may exist if the person valuing your home is also trying to list it?
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).
Additionally, a small number of appraisers (4% in the US) take it a step higher and become designated from one of several national organizations. The Appraisal Institute is the most prominent. Among other things including a rigorous schedule of advanced coursework, there is a peer review process where the appraiser's work is analyzed and approved before a designation can be granted. This is roughly analogous to a doctor becoming board certified. There are other requirements including higher education, hours of experience and detailed, narrative report writing assessments.
Most appraisers that sit on the national boards and subcomittees at the Appraisal Foundation like the AQB (Appraisal Qualification Board) and the ASB (The Appraisal Standards Board that writes USPAP) hold at least one of the designations from the Appraisal Institute (SRA, MAI).
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 estate and probate issues, litigation cases, tax matters and investment decisions. Property owners, attorneys, sellers and buyers also employ appraisers for a number of reasons mentioned in a previous section.
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, sketches, photos 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. Aerial photographs. 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. 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, or taxed fairly by the IRS. A home is often the single, largest financial asset anybody owns. Knowing its true value means you can make the right financial decisions.
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, levels of upgrade / update and take interior and exterior 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 for mortgage purposes, 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.
HOME SELLER SERVICES
If you are planning to sell your home, it might be a wise decision to make a small investment in a professional appraisal. Unless you study real estate values on a day to day basis, like a professional appraiser does, it's difficult for you to get a handle on local markets. We aren’t talking about how much you have invested in your home, how much you paid for it, or how much you want for it. We’re talking about the true market value of your home RIGHT NOW, which could really pay off for you in the long run.
SELLING YOUR HOME FSBO
More and more homeowners today are choosing to sell their homes FSBO (For Sale By Owner) and foregoing the help of a real estate agent. Selling your home by this method can end up saving you a potential “hefty” commission (industry average is 5-6% of the home’s selling price). Plus many FSBO sellers feel that they have more control in the process of selling their home since they’re in essence making all the rules. But selling your home on your own will require a significant amount of "homework" if you're going to do it successfully. One piece of advice that is consistently given by the experts in selling your home FSBO....Do NOT "Overprice" Your Home! It's very hard to be objective about your house because of your emotional attachment to it. A professional appraiser is objective and will tell you what you need to know, not just what you want to hear.
If you’re working with a real estate agent to list your property, more than likely they’ll provide you with a Comparative Market Analysis (CMA) that lists selected sales in your area as one of the first steps in determining what to set as the “Listing Price". This step is vital if you're going to maximize your profit and minimize the home’s time on the market.
But even if you're working with the most experienced real estate agent, it's probably in your best interest to have an "objective" third-party's opinion of value prior to signing a Listing Agreement. And that’s where we come in. We can provide you with a pre-listing appraisal so both you and your agent have an accurate description of your home's features, the square footage and a detailed analysis of the most recent and similar comparable sales. In addition to helping you set a realistic selling price so your home will attract buyers, a professional appraisal can:
- Determine in advance whether or not a prospective buyer will be able to get the necessary financing to close the deal. If it won't appraise, the deal will likely fail.
- Be a very valuable negotiating tool once you have a potential buyer
- Make you aware of problems and eliminate last-minute repair hassles that might delay a closing
- Decrease the chances of unknown problems that cause sales to fall through
- Possibly eliminate the wait for the buyer or their mortgage company to get the appraisal done on their own
Many people are surprised when they find out that the market value of their home is more than they thought, so investing in a professional appraisal actually allowed these people to receive more than they thought they would when their home was sold. Others have an inflated opinion of their home's value and an appraisal helped them to realistically price their home in order for it to sell. An overpriced home will not attract buyers and will in fact better help sell all of the other lower priced competition around you...just what you don't want. This means few offers and no closing leaving you with wasted time, money, and effort.
When you order an appraisal report from Rush & Rush Appraisals, you can expect. . . .
- Prompt response to your initial inquiry: We will give you personalized information for your particular appraisal need. Just tell us your situation and we will make suggestions. Quick turnaround time: Typically one week or less from the date the request is received (if required, 1-day or 2-day expedited service is available at a premium): .
- Appraisal report formats to suit YOUR needs: When it comes to appraisal, "One size does NOT fit all!" We offer a variety of report types and delivery methods. We typically deliver your report attached as a PDF to a standard email, or notify you of an Internet site to download your report, the MINUTE it's completed!
- Quick response to follow-up questions: Our reports are clearly written, understandable, and meet or exceed the Uniform Standards of Professional Practice that governs the appraisal practice. If you have any questions regarding your appraisal, after you've read the report, we encourage you to email or call us!
We understand the stress involved with an employee relocation. We take great care in establishing a convenient appointment time for the appraisal inspection. During our thorough inspection, we encourage relocating employees to provide input on the positive attributes of their property along with information about any recent sales or listings in their neighborhood that they want considered.
ABOUT AVM'S LIKE ZILLOW
7 things an automated or non-appraiser valuation won't tell you
Lenders and brokers using Automated Valuation Models (AVMs) and homeowners using "free online home values" (like ZILLOW or TRUILA) to determine the value of a property need to know what those results aren't telling them.
- Whether the house is really there. A computer can't drive by a house to see if it's actually located where it's supposed to be, has four walls and a roof, and really is a four bedroom split level and not a one bedroom shack.
- Whether unique features of a property might add to or detract from market value. So a computer returns an estimated value of $150,000. Did it account for the sewage treatment station next door? The railroad tracks nearby with trains that blow their whistles every night? The school district? The desirability of its tree-lined street versus the next street over? The fact that the house was just entirely gutted and renovated?
- How long ago the property was assessed. Many AVMs and free online services rely on public assessment records. In many states, for example, assessments may only be required every three years — the value may be nearly three years old in that case. Some states mandate that an assessed value not increase beyond a certain percentage, even if sales activity indicates the property has appreciated far more. When you use an AVM or free online service, you risk a lower value than reality.
- What makes the comparables comparable. A computer might compare your subject property to another property with similar square footage sold three months ago a quarter of a mile away. Even if that "comparable" property is in a different, less desirable school district, fronts a four-lane, 55 M.P.H. street, and is flood-prone. Or even if the property was sold under duress, such as in a divorce situation, or not at arm's length, such as to a family member. A computer simply does not know all the adjustments that might need to be made to a "comparable" property's sales price.
- Whether a market is declining. Automated valuations use data from recent, nearby sales. If those sales were completed at the peak of a local housing market, the computer will think the trend is going up. Even if a professional appraiser knows that the overall neighborhood is in a downturn. As a lender, don't get stuck with a property that's been overvalued by a computer.
- Whether there is a conflict of interest. Free online home values are often farmed out to real estate agents in your area, who use the service to get your listing when you decide to sell. The best way to do that is to impress you with their confidence that they can get a higher price for your property. If they tell you your property is "worth" the high end of what they believe they can sell it for, the theory goes, you're more likely to sign a listing agreement. With most things, it's best to "under promise and over deliver" — but the opposite is true when you use a free online home value service.
- What qualifications, designations, experience and education the preparer of the value has. When you work with an appraiser, you can be confident we're highly qualified, ethical and prepared to complete your assignment professionally and with good judgment. Most of the time, you don't know the qualifications of whoever is behind those free online values, and they couldn't compare to an appraiser's if you did. And if you're relying on an automated valuation, you're cheating yourself out of an appraiser's education, experience and expertise.
Finalizing a divorce involves many decisions, including "Who gets the house"? There are generally two options regarding the house - it can be sold and the proceeds divided, or one party can "buy out" the other. In either case, one or both parties should order an appraisal of the residence. Divorce appraisals require a well supported, professional appraisal that is defensible in court. When you order an appraisal from us, you are assured that you will get the best in professional service, courtesy, and the highest quality appraisal. We also know how to handle the sensitive needs of a divorce situation.
Additionally, we are experienced in court testimony and are called when it goes to the next step as an expert witness. (Additional fees apply for litigation and testimony services.)
Attorneys and Accountants rely on appraisals when calculating real property values for estates, divorces, or other disputes requiring a value being placed on real property. We understand these needs and used to dealing with all parties involved. We provide appraisal reports that meet the requirements of the courts and various agencies.
Attorneys handling a divorce oftentimes need to include an appraisal to establish fair market value for the residential real estate involved. Often the divorce date differs from the date you order the appraisal. We are familiar with the procedures and requirements necessary to perform a retroactive appraisal with an effective date and Fair Market Value estimate matching the date of divorce. The ethics provision within the Uniform Standards of Professional Appraisal Practice (USPAP) binds us with confidentiality, ensuring the fullest degree of discretion.
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 new central air conditioner in Florida will add significant value, while putting one in a home located in Buffalo, New York might not have much impact. The same is true with swimming pools, decks, additions and other improvements.
As a rule, the most value returned from renovating a home comes in the kitchen. According to one national survey, kitchen remodels returned 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%. However, please note that this is very market specific and dependent on your specific neighborhood.
PARTIES IN THE REAL ESTATE SALE AND MORTGAGE
Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the actual value of the property is commensurate with the amount being paid.
The Appraisal Process
This is where the appraisal comes in. An appraisal is an unbiased, third party estimate of what a buyer might expect to pay - or a seller receives - for a parcel of real estate, where both buyer and seller are informed, un-pressured parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property..
So what goes into a real estate appraisal? It all starts with the research and the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, the location, view, quality and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout. Most importantly, the appraiser looks for any obvious features - or defects - both on the property and around the neighborhood that would affect the value of the house.
Once the site has been inspected, an appraiser uses two or three approaches in determining the value of real property: a cost approach, a sales comparison approach and, in the case of a rental property, an income approach.
The cost approach is the easiest to understand. 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. The value of the land is then added. The combined 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.
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the value of certain items (extracted from the local market) such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. 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 half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property to compensate.
In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of the income stream the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. 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 than 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
What is PMI and how to get rid of it
Assuming a decent credit rating, any potential home buyer can secure a loan for a house. Why? Because these transactions are secured by a very valuable asset: the home itself. If a borrower defaults on a loan, the risk for the lender is often only the difference between the value of the home and the amount outstanding on the loan, less the amount it costs them to foreclose and resell the property.
For this reason, lenders are very wary of lending more than a certain percentage of a home's value. Traditionally, this has been 80 percent but this has been changing in reaction to the current uncertain times. The cushion this provides the lender helps ensure that their losses from loan defaults are kept to a minimum.
In recent years, however, it has become increasingly more common to see home buyers using down payments of 10, 5 or even 0 percent. Naturally, loaning this much presents the lender with a lot more risk. To offset this risk, these transactions often required Private Mortgage Insurance or PMI. This supplemental policy protects the lender in case a borrower defaults on the loan, and the value of the house is lower than the loan balance.
PMI has been a large money-maker for the mortgage lenders. The amount of the insurance often $40-$50 per month for a $100,000 house is commonly rolled into the mortgage payment. Given the size of the overall payment, this additional fee is often overlooked. Homeowners continue to pay the PMI even after their loan balance has dropped below the original 80 percent threshold. This occurs naturally, of course, as the home owner pays down the principal on the loan and the property appreciates. On a typical 30-year loan, however, it can take many years to reach that point.
Until recently lenders were under no obligation to tell home owners when they had reached a point where the PMI can be dropped. That all changed in 1999, when the Homeowners Protection Act took effect. In most cases, this law now obligates lenders to terminate the PMI when the principal balance of the loan reaches 78 percent of the original loan amount. Savvy homeowners can get off the hook a little earlier. The law stipulates that, upon request of the home owner, the PMI must be dropped when the principal amount reaches only 80 percent!
It is important to note that this law only applies to home loans whether first time or refinances that closed after July, 1999. Also certain other conditions must be met, such as being current on the loan payments. Buyers that purchased before July 1999 can also have their PMI removed, but they must initiate the process and though the lender is under no obligation to do so, most will.
Of course, there is another way that home owners equity can reach beyond the 80/20 percent ratio. Many areas of the United States have seen significant gains in the value of real estate over the past decade. In fact, certain areas have seen appreciation levels of 100 percent or more. Though this has certainly reversed itself today. Even those people living in areas with more modest gains may find that the value of their property has quickly grown to the point where the amount of principal they owe on their loan is less than 80 percent of the homes current value. Again, in these cases, the lenders are under no legal obligation to remove the PMI. In most cases, however, as long as the home owner has been prompt on their loan payments and don't represent an exceptional risk, the lenders will agree to remove the extra fees.
The hardest thing for most homeowners to know is just when does their home equity rise above this magical 20 percent point? A certified, licensed real estate appraiser can certainly help. It is an appraisers job to know the market dynamics of their area. They know when property values have risen or declined. Many appraisers offer specific services to help customers find the value of their homes and remove PMI payments. Faced with this data, the mortgage company will most often eliminate the PMI with little trouble. The savings from dropping the PMI pays for the appraisal in a matter of months. At which time, the home owner can enjoy the savings from that point on.
For more information on PMI and the Homeowners Protection Act, try one of these links:
Cancelation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year
Private Mortgage Insurance (PMI): Law Requires Lenders to Cancel PMI
**OVER A BILLION DOLLARS OF REAL ESTATE APPRAISED**
WILLIAM RUSH, SRA
CELL: 561-859-4948 EMAIL: email@example.com