Lets start at the beginning!
What is an
appraisal and why do we need one?
A home is probably the largest single investment most
people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a
complex financial transaction that requires multiple parties in order to
make it successful.
A real estate appraisal is a service performed, by an appraiser, that develops an opinion of value based upon the highest and best use of real property. The highest and best use is that use which produces the highest possible value for the property. This use must be legal, profitable and probable. Also of importance is the definition of the type of value being developed and this must be included in the appraisal, ( ie: fair market value, condemnation value, quick sale value, etc.)
VALUATION PROCESS (Simplified)
Below is a brief synopsis of the process an appraiser uses to determine value:
STEP 1: DEFINE THE PROBLEM
Identify client and intended users
Identify the intended use
Identify the type and definition of value
Identify the characteristics of the property (including location and property rights to be valued)
Effective date of the value opinion
STEP 2: THE SCOPE OF WORK
This may vary from assignment to assignment based on the problem being resolved.
STEP 3: DATA COLLECTION AND PROPERTY DESCRIPTION
Market Area Data
General characteristics of region, city, and neighborhood
Subject Property Data
Specific characteristics of land and improvements
Comparable Property Data (Sales, listings)
STEP 4: DATA ANALYSIS
Highest and Best Use Analysis
Site as though vacant
Property as improved
STEP 5: LAND VALUE OPINION
The process of valuing the site as it would stand alone.
STEP 6: THE APPLICATION OF THREE APPROACHES TO VALUE (See below)
STEP 7: RECONCILIATION OF VALUE INDICATIONS AND THE FINAL OPINION OF VALUE
STEP 8: REPORT OF DEFINED VALUE
The Inspection Process
goes into a real estate appraisal? (This is part of step 3 above) The
process starts with the inspection of the property being valued. An
appraiser's duty is to inspect the property being appraised to ascertain the
true status of that property. He or she must actually view features, such as
room layouts (flow of a property's interior), the number of bedrooms, bathrooms,
property amenities such a fireplaces, heating and air conditioning systems,
any modernizations, garages 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 of the property. Most
importantly, the appraiser looks for any obvious features or defects
that would affect the value of the property. The exterior and underneath of
the property are viewed for obvious flaws or defects in construction. Should
defects or repairs be found during the inspection the appraiser may give a
"cost to cure" these items if they are minor in nature or they may recommend
a more complete "home inspection" by a professional home inspector.
It is important to note that appraisers are not "home inspectors". An
appraiser seeks obvious flaws and if possible, determines their cause. This
is not always possible within the limits of an appraisers knowledge. This is
when it becomes important to recommend a home inspector be contacted to
complete a far more thorough inspection.
The Approaches to Value:
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. In the past this value often set 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. As a result this approach has been eliminated as a "required" approach. It is now used for insurance estimating but, most appraisers feel the insurance companies should use their own cost services.
appraisers rely on the sales comparison approach to value these types of
items. As appraisers we get to know the communities in which we work. We
understand the value of certain features to the residents of that area. We
know the traffic patterns, school zones, busy throughways; and we 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.
Combining information from all approaches that are used, 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. The appraised value is most often used as the guideline for lenders who don't want to loan a buyer more money that a property is actually worth. The appraiser, by diligently reporting the facts he has generated through his research and knowledge, will help you the homeowner or the lender get the most accurate property value, so an informed real estate decision can be made.
How you should prepare for an Appraisal:
By law, an appraiser must be state licensed to perform appraisals prepared for federally related transactions. Also by law, you are entitled to receive a copy of the completed appraisal report from your lender but, as stated elsewhere it is the duty of the property buyer or owner to request the copy..
For homeowners, a real estate appraisal is an extremely valuable tool for buying or selling their home. It allows the property transactions to be completed among the buyer, seller, real estate agent and mortgage lender.
It is beneficial if a property owner has the following documents available for the appraiser:
A copy of your deed & plot plan or survey plat of the house and land
Written property agreements, such as a maintenance agreement for a shared driveway
A list of any personal property being sold with the home
Title policy that describes encroachments or easements
Most recent real estate tax bill and or legal description of the property
Home inspection reports, or other recent reports for termites, EIFS (synthetic stucco) wall systems, septic systems and wells
A list of home improvements and upgrades, the date of their installation and their cost (for example, the addition of central air conditioning or roof repairs) and permit confirmation (if available)
A copy of the current listing agreement and broker's data sheet and Purchase Agreement if a sale is "pending".
Information on "Homeowners Associations" or condominium covenants and fees.
A list of "Proposed" improvements if the property is to be appraised "As Complete".
Information on the last purchase of the property (for three years past)
Once your appraiser has arrived, you do not need to accompany him or her along on the entire site inspection, but you should be available to answer questions about your property and be willing to point out any home improvements.
Some other suggestions:
If it is a morning appointment coffee/juice/doughnuts are suggested or an afternoon appointment snack cakes/chips/soft drinks are acceptable.....hey we are allowed a sense of humor, right?
Accessibility: Make sure that all areas of the home are accessible, especially the attic and crawl space.
Housekeeping: Appraisers see hundreds of homes a year and will look past most clutter, but they're human beings too! A good impression can translate into a higher home value.
Maintenance: Repair minor things like leaky faucets, missing door handles and trim.
FHA/VA Inspection Items: If an owner/buyer is applying for an FHA/VA loan, be sure to ask your appraiser if there are specific things that should be done before they come. Items they may recommend: Install smoke detectors on all levels (especially near bedrooms); install handrails on all stairways; remove peeling paint and repaint the effected area; provide inspection access to the attic and crawl space.
Some Assumptions and Facts About
Assessed value should equate to market value.
The appraised value of a property will vary, depending upon whether the
appraisal is conducted for the buyer or the seller.
Market value should approximate replacement cost.
Appraisers use a formula, such as a specific price per square foot, to
figure out the value of a home.
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
You generally can tell what a property is worth simply by looking at the
Because consumers pay for appraisals when applying for loans to purchase or
refinance real estate, they own their appraisal.
Consumers need not be concerned with what is in the appraisal document so
long as it satisfies the needs of their lending institution.
Appraisers are hired only to estimate real estate property values in
property sales involving mortgage lending transactions.
An Appraisal is the same as a home inspection.
What is PMI and how to get rid of it?
Today, companies are eager to lend just about anybody
money. Assuming you have decent credit rating, potential home buyers can
secure a loan for a house. This is because these transactions are secured by
a valuable asset, the home itself. Should a borrower default on a loan, the
risk to the lender is often only the difference between the current fair
market value of the home and the amount outstanding on the loan, less the
costs to foreclose on and resell the property.
Another way that home owner's equity can reach beyond the
80/20 percent ratio, as mentioned above, is due to the often significant
gains in the value of real estate over the past decade. Some areas have seen
appreciation levels of 100 percent or more. 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 home's current value. In these cases, the lenders are
still under no legal obligation to remove the PMI. In many instances,
however, as long as the home owner has been prompt with their loan payments
and don't represent any exceptional risk, reputable lenders will agree to
remove the extra fees. Once again this action must be initiated by the home
Now that you know all there is to know about appraisals and their benefits, you are ready to order one or to ask your lender to give us a call. See our appraisal request form or our phone/fax/email information. Thanks for stopping by!