Facts About Residential Real Estate Appraisals

 

Appraisals are an Important Part of Your Home Buying Transaction
A Cosden-Langfitt real estate appraisal helps to establish a property's market value–the likely sales price it would bring if offered in an open and competitive real estate market.

Your lender will require an appraisal when you ask to use a home or other real estate as security for a loan, because it wants to make sure that the property will sell for at least the amount of money it is lending.

Don't confuse a comparative market analysis, or CMA, with an appraisal. Real estate agents use CMAs to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price with their CMAS, but an appraiser's report is much more detailed--and is the only valuation report a bank will consider when deciding whether or not to lend the money.

About Appraisals

• The property being appraised is called the subject property.
• You will probably pay for the appraisal when you apply for your loan.

What You'll See on a Residential Appraisal Report

Appraisals are very detailed reports, but here are a few things they include:
• Details about the subject property, along with side-by-side comparisons of three similar properties.
• An evaluation of the overall real estate market in the area.
• Statements about issues the appraiser feels are harmful to the property's value, such as poor access to the property.
• Notations about seriously flawed characteristics, such as a crumbling foundation.
• An estimate of the average sales time for the property.
• What type of area the home is in (a development, stand alone acreage, etc.).

Residential Appraisal Methods

There are two common appraisal methods used for residential properties:
Sales Comparison Approach
The appraiser estimates a subject property's market value by comparing it to similar properties that have sold in the area. The properties used are called comparables, or comps.

No two properties are exactly alike, so the appraiser must compare the comps to the subject property, making paperwork adjustments to the comps in order to make their features more in-line with the subject property's. The result is a figure that shows what each comp would have sold for if it had the same components as the subject.

Cost Approach
The cost approach is most useful for new properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed.

So What Does the Appraisal Mean to You?

Your personal approval is accomplished early in the loan process, but final loan commitment usually hinges on a satisfactory appraisal. The bank wants to be sure its investment is covered in case you default on the loan.

If the property appraises lower than the sales price, the loan might be declined, but that isn't the only hurdle it must pass. Other facts on the appraisal can be a problem, too:
• The bank probably won't like it if the estimated time to sell the property is longer than the area average.
• If the appraiser notes that entry to the property is from a private, shared road the bank might want to see a road maintenance agreement signed by everyone who uses the road, verifying that maintenance is shared by all parties.

Those are just a few examples of negatives that could stall your purchase. The lender will study the appraisal carefully before determining whether or not the property qualifies to serve as security for your loan.

An Appraisal Isn't a Home Inspection!

Appraisers make notations about obvious problems they see, but they are not home inspectors. They do not test appliances, look at the roof, check the chimney or do any other typical home inspection tasks. Never count on an appraisal to help you determine if the home is in good condition.

If the Appraisal Comes in Low

Don't panic if the appraisal comes in low, because there are often steps you can take to make the deal work.

If the appraisal uncovers other problems, remember that most problems are correctable. Try to keep your cool and work through issues one step at a time.

Appraisers are, by far, the most technical agents in the real estate world. By necessity, they have been drawn into the digital world at a pace not seen by their colleagues. The appraisal process is one that lends itself to technology. And technology has paid significant dividends to those appraisers who have invested in it. These dividends are shared with the appraiser's customers, in the form of shorter turn-around times and a much better final valuation report.

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.

Why would a person need a home appraisal?

There are many reasons to obtain an appraisal with the most common reason being real estate and mortgage transactions. Other reasons for ordering an appraisal include:
• To obtain a loan.
• To lower your tax burden.
• To establish the replacement cost of insurance.
• To contest high property taxes.
• To settle an estate.
• 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.
• 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. An 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)?

Simply put, the difference is night and day. The CMA relies on vague market trends. The appraisal relies on specific, verifiable comparable sales. In addition, the appraisal looks at other factors like condition, location and construction costs. 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. 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 income is tied to the value of the home.

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).

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, an appraisal helps. 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. A home is often the single, largest financial asset anybody owns. Knowing its true value means you can 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, and take several 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, 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.

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 central air conditioner in Houston, Texas may add significant value, while putting one in a home located in Buffalo, New York might not have much impact.

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%.