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Appraisal 101

What is an Appraisal?

An appraiser provides an estimation that generates an opinion of value. This opinion or estimate is found through a formal process that commonly uses three "common approaches to value". The Sales Comparison Approach involves searching for similar properties nearby and finding value based on making a comparison of those prior sales to the house being investigated. Being the most common approach, the Sales Comparison Approach is generally the most precise and best indicator of market value for a home. The Cost Approach is one of the processes that appraisers use to find the value of a property; it involves finding what the improvements would cost less physical depreciation, adding the land value. The Income Approach is primarily used for determining the market value of income-producing properties based on what an investor would pay based on the amount of income a property would bring in.

Define "Market Value"

In real estate appraising, Market Value is commonly defined as:
"The most probable price (in terms of money) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and 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: the buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and 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."

What does an appraiser do?

An appraiser provides a fair and credible assessment of market value, in the support of real property exchanges. Appraisers document their analysis in appraisal reports.

Appraiser’s State Licensing Requirements

To become a Certified/Licensed appraiser, there are extensive education requirements as well as thousands of hours and real world experiences that must be attained. Likewise, certified appraisers must abide by a strict industry code of ethics and respect national standards of practice for real estate appraisal. The guidelines for carrying out an appraisal and communicating its results are insured by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP). Regulations regarding licensing and certification are different from state to state. In general, licensing and certification is commonly associated with many hours of classroom study, tests and experience working under a supervisor. Once licensed, he/she must then engage in continuing education courses so that the license doesn't expire.

Why would someone require a real estate appraisal?

There are a lot of reasons to order an appraisal with the usual reason being real estate and mortgage transactions. Some other reasons for ordering an appraisal report include:

  • If you are applying for a loan.
  • To lower your property taxes.
  • To demonstrate a homeowner's acquired equity and remove PMI.
  • To deal with an estate.
  • To offer you an edge when purchasing real estate.
  • To find the most probable property value when putting your home on the market.
  • To protect your rights if your property is being taken by means of eminent domain in a condemnation case.
  • Because a government agency such as the IRS requires it.
  • If you ever find yourself 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 comprehensive home inspection. A third-party home inspector will investigate the structure of the home, from the roof to the bottom. Commonly, a home inspection report will explain the amenities and the requirements of the house: air conditioning (weather permitting), electrical systems, the condition of the heating system, the plumbing; then the structural integrity of the home such as the attic, accessible insulation, walls, floors, ceilings, windows, then the foundation, basement and visible structures.

Is an appraisal the same as a comparative market analysis (CMA)?

Honestly, they have nothing in common. What the CMA depends on are superficial trends. The appraisal relies on similar definite comparable sales. In addition, the appraisal checks other factors like condition, location and construction costs. The CMA will provide a non-specific figure. Delivering a defensible and careful analysis, an appraisal will give a clear opinion of value.

But the most significant factor is the person behind the report. A CMA is created by a real estate agent who may or may not be trained in technical valuation concepts or even have a handle on market trends. A certified, Wisconsin licensed professional who made their livelihood on valuing real estate in and around the local market creates the appraisal. Moreover, the appraiser is an independent party, with no vested interest in the property's value, unlike the real estate agent, whose income is tied to the value of the home.

What does the appraisal report contain?

The main point of an appraisal report is to let the reader know the value of the real estate in question, and depending on the scope of the report, one will customarily see the following:

  • The client and whose purposes the appraisal is to serve.
  • The intended use of the appraisal.
  • The appraisal's purpose.
  • Precisely what "value" attribute is being reported and what that value means.
  • The effective date of the appraiser's opinions and conclusions.
  • Pertinent property characteristics, including: location, physical description, legal attributes, economic attributes, the property rights valued, and non-real estate items included in the appraisal, such as personal property, trade fixtures and even intangible considerations.
  • 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.
  • What was entailed in the process of completing the appraisal?

To become a state licensed appraiser, there are extensive education requirements as well as real world experience that must be attained. Likewise, appraisers must abide by a strict industry code of ethics and respect national standards of practice for real estate appraisal. The guidelines for carrying out an appraisal and communicating its results are insured by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).

Regulations regarding licensing and certification are different from state to state. In general, licensing and certification is commonly associated with many hours of classroom study, tests and experience working under a supervisor. Once licensed, he/she must then engage in continuing education courses so that the license doesn't expire.

Where do appraisers obtain the information used to estimate values?

Gathering data is one of the primary functions of an appraiser. Data can be divided into Specific or General. Specific data is from the property itself; Location, condition, amenities, size and other specifics are gathered by the appraiser during an inspection.

General data is gathered from a variety of places. To research recent sales to be used as "comps", an appraiser will often use the local Multiple Listing Service. Tax records and other courthouse documents reveal actual sales prices in a market. And most importantly, the appraiser assimilates general data from his or her past experience in doing assignments for other houses in the same market.

My mortgage statement has an item on it for PMI? Can I get rid of that?

PMI is an acronym for Private Mortgage Insurance. This added policy takes care of the lender in the event a borrower is unable to pay on the loan and the market price of the property is lower than the balance of the loan. Once you reach the point where your home's equity plus the amount you've paid is at least 20% of your loan balance, you can typically have your PMI dropped.

Should I do anything in advance of the appraisal appointment?

We begin with an inspection of the home. What this entails is the appraiser, after setting up an appointment, personally going through the home - recording the layout of the rooms, taking photos of all rooms and documenting the general condition of its features. Inside, pick up any clutter and make sure we can get to things like furnaces and water heaters. On the outside, trim any landscaping so we can be free to get an accurate measurement of exterior walls.

The following items, if available, will help your appraiser to provide a more accurate appraisal in a shorter period of time:

  • Information on the latest purchase of the property in the last three years.
  • List of personal property to be sold with the home.
  • Information on "Homeowners Associations" or condominium covenants and fees.
  • A copy of the current listing agreement and broker's data sheet and Purchase Agreement if a sale is "pending".
  • Most recent real estate tax bill and or legal description of the property.

Does the appraisal belong to the bank or the consumer?

In most real estate mortgage transactions, the appraisal is ordered by the lender or the appraisal management company (AMC). While the 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 buyer is certainly entitled to a copy of the report - it's usually bundled with all the other closing documents - but is not allowed to use the report for any other purpose without permission from the lender.

The exception to this rule is when a home owner hires an appraiser directly. In these cases, the appraiser may state 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 do whatever they want with the appraisal.

I want to get more for my house. Where should I spend money renovating?

As a rule, the most value returned from renovating a home comes in the kitchen. Studies reveal that a kitchen remodel would add value to the home and would be the highest return on investment. Bathrooms are right up there with kitchens, yielding a good rate of return as well. Adding bedrooms and baths can also boost the value of your home as long as your home doesn't then become an oddball for your neighborhood in terms of size. Please note, every home and neighborhood is different and the above information are only general guidelines.

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