Real Estate Appraisers and Appraisals
Commonly Asked Questions about Real Estate Appraisers and Appraisals:
What is an appraisal?
An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience and professional judgment of the appraiser.
What is the role of the appraiser?
The role of the appraiser is to provide objective, impartial and unbiased opinions about the value of real property, providing assistance to those who own, manage, sell, invest in and/or lend money on the security of real estate.
What qualifications must appraisers have?
At minimum, all states require appraisers to be state licensed or certified in order to provide appraisals to federally regulated lenders. However, appraisers who become designated members of the Appraisal Institute have gone beyond these minimum requirements. They have fulfilled rigorous educational and experience requirements and must adhere to strict standards and a code of professional ethics. The Appraisal Institute currently confers the MAI membership designation on those who are experienced in the valuation of commercial, industrial, residential and other types of properties. The SRA professional membership designation is held by those who are experienced in the analysis and valuation of residential real property.
How do well-credentialed appraisers add value to real estate transactions?
They bring knowledge, experience, impartiality and trust to the transaction. In so doing, they help their clients make sound decisions with regard to real property.
What are the components of an appraisal report?
Most appraisals are reported in writing, although in certain circumstances, an appraiser may provide an oral appraisal. A written appraisal report generally consists of: a description of the property and its locale; an analysis of the “highest and best use” of the property; an analysis of sales of comparable properties “as near the subject property as possible”; and information regarding current real estate activity and/or market area trends.
What are the most important considerations in the valuation of real property?
The value indicated by recent sales of comparable properties, the current cost of reproducing or replacing a building and the value that the property’s net earning power will support are the most important considerations in the valuation of real property.
What is the range of services appraisers provide?
In addition to residential or commercial appraisals and depending upon an appraiser’s designation and qualifications he or she may be able to assist with the following:
Estate planning and estate settlements
Tax assessment review and advice
Advice in eminent domain and condemnation property transactions
Dispute resolution including divorce, estate settlements, property partition suits, foreclosures, and zoning issues
Expert witness testimony
Market rent and trend studies
Cost/benefit or investment analysis, for example, what will be the financial return on remodeling
Land utilization studies
Supply and demand studies
When hiring an appraiser, what types of questions should I ask?
The following questions would be appropriate:
Are you licensed or certified in the state in which you live?
What professional designations do you have and from what groups?
How long have you been in practice?
What level of experience do you have in this particular market and with this type of property?
Are you familiar with property in this neighborhood?
What types of clients have you had (homeowners, estates, lenders, relocation companies)?
How can I find out what my house is worth?
As a homeowner, you may have reason to question the value of your home on various occasions. These may include planning to buy or sell a home, appealing your property tax assessment, seeking to eliminate payment of private mortgage insurance or undertaking a major home renovation project. Valuation consultants will tell you that your home may have different values for different purposes.
MARKET VALUE: For buying and selling, market value can indicate the most probable price at which a home should sell in a fair sale in a competitive market.
INSURABLE VALUE: The insurable value the cost of replacing your property if it were destroyed or damaged can used to underwrite fire and hazard insurance.
ASSESSMENT VALUE: Real estate taxes are generally based on the assessed value of your home, as estimated by your local assessor; this value is usually based on market value.
When is Appraisal Needed?
Buying or Selling a Home. If you’re planning to sell your home, setting an appropriate listing price can help to speed the sale. An appraiser, using market data, arrives at an opinion of market value that can help you decide on a fair listing price. Similarly, when you’re shopping for a new home, a professional appraisal can indicate if the listing prices of homes you’re considering are in line with the actual sale prices of similar properties.
Transfer of ownership typically involves a mortgage, and an appraisal usually is required before a home loan is approved. Lending institutions may require an appraisal of property that will be used as security for a mortgage, and this opinion of value plays a key role in mortgage application approval and the amount of down payment required.
Canceling Private Mortgage Insurance. New homeowners are frequently required to obtain private mortgage insurance, but as a result of legislation passed by Congress in 1998, homeowners can cancel this coverage when their loan to value ratio reaches 80 percent. To take advantage of this option a homeowner generally must have a good payment history and satisfy the holder of the mortgage that the value of the property has not declined below its original value. An appraiser can develop an opinion of the current value of the home, which will assist the homeowner in deciding whether or not to ask the lender to drop mortgage insurance.
Relocating for a Job. Real estate appraisals are often needed by relocation firms that assist employers in the transfer of their employees.
Sometimes, the relocation firm offers to purchase an employee’s home if the employee is unable to sell the home during a specified time period. An appraiser is called in to estimate the market value of the home; this estimate of value helps the relocation firm decide how much to pay for the property. The appraiser may be selected by the relocation firm, the employer or by the homeowner-employee, depending on the relocation firm’s policy.
Appealing Your Tax Assessment. In most communities real estate taxes are based on an ad valorem (“according to value”) assessment of your property’s value. If you believe the assessed value is unfair, you may have the right to appeal the assessor’s valuation. Many assessment appeals can be resolved with a telephone call or letter to your local assessor. If a dispute is carried beyond this point, however, you may want a professional appraiser to give you an independent opinion of value to bolster your appeal to the assessor.
Insuring Your Home. Although most reputable insurance brokers can tell you if your fire and hazard coverage is sufficient, there are properties that may require a closer examination for example, older buildings, custom built homes or properties with unusual features such as solar energy collectors. An appraiser can give an opinion of the insurable value of your home by using the cost approach.
Remodeling and Rehabbing. Many homeowners today are choosing to fix up rather than trade up: to remodel and enlarge a present home rather than move to another home. But don’t count on receiving a dollar-for-dollar return at resale time, improvements may not return their costs. Some highly personalized improvements can even handicap the sale of your home. If you’re considering improving your home with the intention of increasing its resale value, an appraiser can help you decide which improvements make the most economic sense.
If you’re undertaking a major rehabilitation project, a feasibility study can be very useful. The appraiser conducting the study analyzes the condition of the property and the cost of rehabilitation and prepares an estimate of the property’s value after improvement (the improved value will affect the ad valorem real estate tax). In addition, the appraiser will examine the surrounding neighborhood in terms of growth, structure and change. The appraiser can also investigate whether your property qualifies for historic preservation benefits from the federal and local governments. All of the data, gathered and analyzed by the professional appraiser, can aid you in your decision to rehabilitate.
Other Decisions Requiring Appraisals. An experienced, professional appraiser can assist in many other real estate decisions. Appraisers often are asked to estimate “just compensation” in situations where the government takes private property for public use, such as for a road or public park. The law requires that owners of the property taken in this manner must be paid a fair price. Appraisers also can give an opinion of value of property for gift or inheritance taxes, lease rental schedules and other investment purposes.
The Appraisal Process
An appraiser needs to know the purpose of an appraisal to begin the process of valuation. The appraiser will propose an appropriate fee based on the estimated work involved in the assignment. Fees vary according to the complexity of an assignment and appraiser’s experience, special expertise and reputation. Professional appraisers do not structure their fees contingent on the final conclusion of value.
Approaches to Value. Appraisers generally use three basic methods to arrive at a conclusion of property value: the sales comparison approach, the cost approach and the income capitalization approach. Wherever appropriate, all three methods are used in an appraisal.
SALES COMPARISON APPROACH: The sales comparison approach is used to compare sales of similar properties, taking into account differences among properties that may affect value. The sales comparison approach is typically the most applicable method of valuing single-family houses, townhouses and condominiums.
COST APPROACH: The cost approach is based on the current cost of replacing or reproducing a property. After estimating the cost of building the structures on a property, and deducting an amount for depreciation, the appraiser adds the estimated value of the land and arrives at an indication of value. This method is particularly useful for estimating insurable value.
INCOME CAPITALIZATION APPROACH: The income capitalization approach is based on a property’s potential rent. This method is obviously most useful for valuing income-producing properties, but it can be applied whenever rental figures from similar properties indicate what the potential rental income would be if your property was leased.
Generally, the appraiser inspects your property, collects specific data about it as well as comparable properties in the same market, and analyzes general information about the property market. Using one or more of the three methods of estimating value, the appraiser arrives at a final conclusion.
The appraiser’s final opinion of value and supporting data are typically presented in a written appraisal report. Many single-family residential appraisals are reported on a standard form used by most lending institutions; some appraisals require detailed narrative reports supplemented with statistical data and photographs. Regardless of the report’s format, the appraiser must be able to support the conclusions and explain the process clearly. Throughout the process, the appraiser uses professional judgment.
The Value of a Good Appraiser
Whatever the reason that calls for a value estimate of your home, you should engage the services of a designated member of the Appraisal Institute. These professionals have met stringent education, experience and ethics requirements that surpass many of those required for state licensure. Reflecting their unbiased and objective approach to real property appraisal and analysis, members of the Appraisal Institute are required to adhere to a strictly enforced Code of Professional Ethics and Standards of Professional Appraisal Practice. Appraisal Institute members may hold the prestigious MAI, SRPA and SRA designations.
The appraiser can estimate your home’s Market Value, Actual Cash Value, or both. For a mere fraction of your property’s value, a professional appraisal gives you a reliable, objective benchmark of what your home is worth.
What do Appraisers Do?
An appraiser will thoroughly inspect your property, including the interior and exterior of any buildings. The appraiser will take measurements to establish square footage. Once the inspection is complete, the appraiser will canvass the neighborhood for information on similar properties. The appraiser will also search the mls (multiple listing system) real estate database to find properties with similar features, and note their value. From all this information, a value range will be assigned to the property.
Can You Affect the Outcome of Your Appraisal?
Yes. Here are some tips for helping an appraiser to assign full value to your home or other real property:
- Make a list of the significant improvements you’ve made to the property in the last 5 years, and the amounts you’ve spent.
- Clean and tidy up both the interior and exterior of the property before the appraiser arrives. The condition of the structures, yard, and landscaping will all affect the appraised value.
- Check with an appraisal firm before renovating. Some renovations increase the value of a property more than others. It pays to check out how much of your investment you can expect to recoup.
- If you know of comparable properties that have recently sold in the neighborhood, make sure to tell the appraiser the addresses and selling prices of those properties. This helps to establish a current value benchmark.
- Leave plenty of time to have your appraisal made, but don’t be premature. In most cases, an appraisal is “good” for about 90 days after it is made. After that time, the bank or insurer may require an update. Updates are less expensive than a full appraisal, but there is a fee involved.
How Much Does a Home Appraisal Cost? The cost of a home appraisal will depend on how long the appraisal process takes. Larger, more complex homes will cost more to appraise since it takes longer to inspect the house and property to determine what the home is worth.
Currently, home appraisal fees start at around $295 for individual residential properties. As a very rough guide, expect to pay about $2-3 per thousand dollars’ worth of value in the property. For example, a $1,000,000 home will cost around $2500 to appraise.
This paper is intended for informational purposes only. Nothing contained herein constitutes legal, financial or other professional advice. Transmission of these materials is not intended to create, and receipt does not constitute, any relationship of any kind between the provider and the recipient. Some of these points may not apply in your area. Different term and conditions may vary from state to state and province. Download PDF