FAQ
What is an appraisal? back to top
An appraisal is an exercise involving research, experience, training and data collection, leading to an opinion of value. This opinion or estimate of value, is arrived at through a formal process that typically uses the three ''common approaches to value''. The 3 approaches to value consist of: 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. FNMA (Fannie Mae) which is one of the regulatory agencies for loans, currently does not require the cost approach, though some lenders/investors may require it.
What does an appraiser do? back to top
An appraiser collects market data value, measures and documents the “subject property” – the property to be appraised, drives by and reads all information regarding comparable properties, and 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? back to top
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 for purchase or refinancing purposes
- To lower your tax burden.
- To establish the replacement cost of insurance.
- To contest high property taxes.
- To settle an estate, or to provide estate planning information
- To provide a negotiating tool when purchasing real estate, or to establish a possible listing price
- To protect your rights in a condemnation case.
- If you are involved in a lawsuit.
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 do a complete home inspection, in terms of mechanical, electrical, structural, etc.
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, interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.
An Appraiser is interested in market value, meaning homes that are similar to the “subject property” in terms of square footage and size, condition, age, location, style of home and other amenities that are desirable within the market place, like wood decks, patios, sprinkler and security systems, hot tubs, etc.
What is the difference between an Appraisal and a Comparative Market Analysis (CMA)? back to top
Simply put, the difference is night and day. The CMA relies on vague market trends. The appraisal relies on specific, verifiable comparable sales. 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. Sometimes the CMA may include listings on properties that have not yet sold in the market place. The appraisal is created by a licensed, certified professional who has made a career out of valuing properties. The appraiser is an independent party, 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.
Are Real Estate Appraisers Licensed? back to top
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). New appraisers must apprentice with a “Senior” or Supervisory appraiser for more than 2,000 hours, sometimes meaning an apprenticeship of 1.5 to 2 years, or longer.
How are appraisers certified? back to top
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.
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. Appraisers may also use their files for historical or relevant data.
Flood zone data is gathered from FEMA data outlets, such as a la mode's InterFlood product. 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
Anytime the value of your home or other real property is being used to make a significant financial decision, an appraisal can provide significant data. 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, the appraisal can provide an independent and fair evaluation. A home is often the single, largest financial asset anybody owns. Knowing its true value means you can make knowledgeable 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.
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 inside, confirm all aspects of the home's general condition, and take several photos, exterior and sometimes interior photos, of your house for inclusion in the report. Some of the things 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. It is important to showcase your home in the best condition possible, so that interior pictures will present a good portrait of your home.
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.
Have a list of recent renovations, or improvements to your home. Include amounts you spent, if possible.
Appraisers can only give value or comment on improvements or renovations you have completed before the date of the appraisal. Money or improvements you “plan to spend” in the distant or near future, cannot be given value, or commented on in the appraisal report by the appraiser.
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, 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.
Appraisers utilize closed sales as market comparable properties, most likely in the same subdivision or neighborhood of the “subject property.” Listings or homes for sale in the area that have not closed on the day of or before the appraisal date, are typically not used to establish value for the home.
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 or current owner may pay for the report as part of the closing costs, or “at the door” on the day of the appraisal, 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 he/she (the homeowner or home 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, 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? back to top
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, or mountain or treed views my distinguish a home from some others in the neighborhood.
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%.
