Frequently Asked Questions
An appraisal is a thought
process leading to an opinion of value. This opinion or estimate 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. 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.
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?
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?
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)?
Simply put, the difference is
night and day. 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 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.
What does the appraisal report contain?
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?
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 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?
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.
Who do appraisers work for?
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.
Where does an appraiser get the information
used to estimate value?
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. 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?
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?
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.
How do I get ready for the appraiser?
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 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 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.
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.
What is ''Market Value?''
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?
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.
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