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Frequently Asked Questions: Real Estate Appraisal

What is an appraisal? Back to top

An appraisal is a process an appraiser goes through 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''. 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 which is based on the Principle of Substitution (The principle of substitution says that no prudent person would pay more than the cost of acquiring an equally desirable substitute 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. 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,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.

  • 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? Back to top

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)? Back to top

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 independent and unbiased, 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? Back to top

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? Back to top

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 collectivel.

  • 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).

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. To see the specific Appraiser requirements for California, click here.

Who do appraisers work for? Back to top

The largest users of appraisals by far are by mortgage lenders to estimate the value of the secured real estate involved in a loan transaction. Appraisers also work for those who need appraisals (value opinions) for litigation, tax matters, investment decisions, cash real estate buyers, estate administration.  Most often these are attorneys, CPAs, REALTORS®, buyers, sellers and Trustees.

Where does an appraiser get the information used to estimate value? Back to top

Information (data) about the subject property, marketing area and neighborhood is of primary importance to an appraiser.  Data gathering falls into two areas, one is for specific information about the subject property and the other is general information about the marketing area and neighborhood. Specific data is gathered from the home itself, mls and public records.  General data about the marketing area and neighborhood comes from the appraiser's experience, mls, internet searches, Inside Tract and Home Value Trends. Flood zone data is gathered from FEMA data sources. The internet has proved most valuable to appraisers to obtain aerial photos and other neighborhood and market information.  The appraiser's past experience in the subject property's neighborhood is very important.

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 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.

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 the monthly pmi payment.

What do home appraisers look for? 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 inclusion in the report. The best thing you can do to help is make sure the appraiser has easy access to the exterior and interior of the house. On the inside, make sure that the appraiser can easily access items like furnaces and water heaters. For FHA financing, the appraiser will need to view the attic and crawl space.  Have C/O and smoke detectors is now a requirement for many lenders and is a California state requirement. If building plans are available, have them ready and a place where the appraiser can view them.

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.

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 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. In general, the appraiser's client (most times the person who ordered the appraisal) owns the appraisal.  The appraisal is confidential to the client.

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, 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%.

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