Answers to Your Valuation Questions

An appraisal report is an investigation that allows the appraiser to come to an opinion of value. There are three "common approaches to value" which help the appraiser conclude this opinion or estimate. One of the processes in use is the Cost Approach, which is what it would cost to restore the improvements to the property, minus depreciation and physical deterioration, adding to the land value. Another of the processes is the Sales Comparison Approach - which involves making a comparison to other similar nearby properties that have recently sold. Being the most commonly used approach, the Sales Comparison Approach tends to be the most accurate and best indicator of the worth of a house. One of the least common approaches to appraising houses is the Income Approach, which is generally used to find the value of a property based on what an investor would pay based on the income produced by the property.

The most important point of an appraiser's job is to provide an unbiased, professional opinion of value to help out with financial transactions. A complete investigation is displayed by the appraiser in a report.

There are a lot of reasons to order an appraisal, with the usual reasons being real estate and mortgage transactions. A few other reasons for obtaining an appraisal include:

  • To receive a loan.
  • If you would like to reduce your property tax obligations.
  • To show the replacement cost of Primary Mortgage Insurance.
  • To challenge high property taxes.
  • If you need to settle an estate.
  • To offer you a leg-up when purchasing real estate.
  • To find an honest sales price when selling real estate.
  • To protect your rights in a condemnation case.
  • Government agencies such as the IRS need an appraisal of every home.
  • It's possible you could have to deal with being in a lawsuit - an appraisal will definitely help.

Appraisers do not provide home inspections and are not home inspectors. The point of a home inspection is to evaluate the structure of the house from foundation to rooftop. Commonly, a home inspection report will evaluate the amenities and the necessities of the house: air conditioning (weather permitting), electrical services, the condition of the heating system, and the plumbing; then the structural integrity of the home, such as the attic, accessible insulation, walls, floors, ceilings, and windows; then the foundation, basement and visible structures.

Simply put, the difference is similar to night and day. What the CMA relies upon are ill-defined trends. An appraisal relies on comparable sales that can be verified by records. Area and construction costs are also important in an appraisal. All a CMA does is generate a "ballpark 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.

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.

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 be state-licensed or certified. The state-licensed or certified appraiser is trained to render an unbiased opinion based on 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 the enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).

Regulations regarding licensing and certification of Real Estate Appraisers vary from state to state. However, licensing and certification are 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.

Typically, appraisers are employed by lenders to estimate the value of real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters, and investment decisions.

Gathering data is one of the primary roles of an appraiser. Data can be divided into specific and general categories. 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. Flood zone data is gathered from FEMA data outlets, such as Metro Appraisals' InterFlood product. And most importantly, the appraiser gathers general data from his or her experience in creating appraisals for other properties in the same market.

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, make 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, the largest financial asset anybody owns. Knowing its true value means you can make the right financial decisions.

PMI stands for Private Mortgage Insurance. It insures a lender against losses 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.

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 be state-licensed or certified. The state-licensed or certified appraiser is trained to render an unbiased opinion based on 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 the enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).

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 condition’s 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.

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 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 homeowner engages an appraiser directly. In these cases, the appraiser may stipulate how the appraisal can be used, for PMI removal, estate planning, or tax challenges, for example. If it is not stipulated otherwise, the homeowner can use the appraisal for any purpose.

The answer to this is different depending on 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 from 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%.