The Importance Of A Professional Real Estate Appraisal Back to top
Because much private, corporate, and public wealth lies in real estate, the determination of its value is essential to
the economic well-being of society. It is the job of the professional appraiser to determine these values by gathering,
analyzing, and applying information pertinent to a property.
Unquestionably, the professional opinion of the appraiser,
backed by extensive training and knowledge, influences the decisions of people who own,
manage, sell, purchase, invest in, and lend money on the security of real estate. And
because the appraiser is trained to be an impartial third party in the lending process,
this professional serves as a vital "check in the system," protecting real
estate buyers from overpaying for property as well as lenders from over lending to buyers.
Appraiser Qualifications Back to top
Many states require all real estate appraisers to be, at a minimum, state licensed or
state certified and have fulfilled rigorous education and experience requirements and must
adhere to strict industry standards and a professional code of ethics as promulgated by
the Appraisal Foundation. To see the specific requirements for any state click here.
How long does an appraisal take? Back to top
The physical inspection of the real property being appraised can take from approximately
fifteen minutes to several hours, depending upon the size and complexity involved.
After the initial inspection of the property the appraiser spends time touring through the
neighborhood or area. The purpose of this tour is to search for comparable sales (other properties
that are similar to the property being appraised) that have sold within the last six months to a year or so. When the
field work is finished, the appraiser completes the report at his office. The report can consist of
a short form report (typically under ten pages) to a long narrative report which can sometimes exceed
a hundred pages. A short form report usually takes between three to six hours to complete. A narrative
report can take weeks or sometimes even months, depending upon the complexity of the assignment.
Where does an appraiser get the information needed to complete an appraisal? Back to top
The appraiser gets his or her information from a wide variety of sources, including the local Multiple Listing Service,
local tax assessors records, local real estate professionals, county courthouse records, private public record data vendors,
interviews with sellers and buyers, appraisal data co-operatives and his or her own personal knowledge or office files from
previous appraisals. The quality and reliability of each piece of information is considered by the appraiser.
Appraisal VS. Engineer or Whole House Inspection? Back to top
The appraiser is not a whole house inspector, engineer, architect, electrician, plumber, H.V.A.C.
technician or contractor. The appraiser briefly walks through the house to get an idea of the general
condition and room count. An appraisal is not a guarantee of condition. The appraiser will ask about
any visible problems and those which may not be visible, and will do his/her best to gauge any impact
on value attributable to those problems. You are encouraged to seek the advice of experts if you
have any questions about the structural or mechanical aspects
What does the appraiser look for? Back to top
Typically, an appraiser needs to document the condition of the property, both inside and out,
from the layout and features to degree of modernization including any updates as well as the overall
quality of construction. This information will help to assist the appraiser throughout the valuation
and comparison process.
The appraiser estimates the square footage (GLA - gross living area), by measuring the exterior of the
home. Non-living areas, such as garages or covered porches, aren't included in GLA, but are accounted for
and considered in value separately. Finished basements are also calculated separately from the above-ground
GLA. The local market will dictate the contributory value of the finished basement, which can be influenced
by governmental regulations, the degree of modernization, the quality of the finish, and other factors.
The appraiser will generally consider only permanent fixtures and real property. Because many above-ground
swimming pools and small sheds are not permanent structures, they typically usually aren't included in the
valuation. Depending on the specific installation process and local custom, however, an above ground pool
or small shed might be considered part of the real property.
What improvements add the most value to my home? Back to top
Just how much any particular individual improvement might add to your home's market value, what appraisers typically call
the contributory value, can often vary widely from market to market, dictated by the wants and needs of each neighborhood.
However, a local appraiser familiar with your market can help you figure out the best home-improvement value. Check out
Remodeling On-Line's Cost Vs. Value Report which
features some information on how improvements might increase the value of your home from market to market.
If my appraisal comes out higher than my tax value, could my real estate taxes go up? Back to top
Absolutely not!. The appraiser is required to maintain confidentiality with the client, which would typically be you (if you
undertook the appraisal) or the bank (in a mortgage related appraisal), not the local tax authorities.
Short form "2055" Vs. "URAR Fannie Mae" Form Appraisal Report Back to top
A "Fannie Mae" - URAR form report has many items
required by the secondary mortgage lending market, that are not necessarily needed in a
simple report to find the market value. Both primarily rely on a direct sales comparison
or market approach with a comparison grid (see below) to determine the market value of the
subject property. The lenders report has many additional arbitrary requirements which have
little bearing on the value found by a report needed for many other purposes. The
traditional "lender" reports need census tract & smsa information for
tracking lending patterns. Some lender reports require a lot of the appraisers effort to
determine and substantiate how much additional rental income is available to support a
higher mortgage. In addition, a great deal of detail is required to help the lender
determine what if any, necessary repairs might be needed before the property meets their
underwriting requirements. All of these things and much more, may be quite important for a
lender, but probably are useless for most people, who just want to know what a property is
worth for a variety of reasons. Our short form reports are particularly well suited for
helping a seller to price a home for sale, helping a buyer to decide how much to offer or
pay for a home, for estate tax, gift tax, tax grievance, uncontested divorce & most
any other potential use other than for obtaining a mortgage or in litigation where the
report will be used in conjunction with expert testimony.
Services provided Back to top
In our complex society, you may need and use the services of
a professional real estate appraiser for a variety of reasons. Depending upon an
appraiser's designation and qualifications, he or she can provide some or all of these
services: Appraisals - Residential or Commercial; Counseling and Consulting; Evaluations;
Expert Witness Testimony; Litigation Preparation; Feasibility Studies; Market Analysis;
Market Rent & Trend Studies; Tax Assessment Review and Advice or Zoning Testimony.
Know Your rights in the appraisal process! Back to top
Under the Equal Credit Opportunity Act, your lender must provide you with a copy of the appraisal report upon
your written request. If you are dissatisfied with any information contained in your appraisal report, you should contact
your lender immediately.
What is the difference between a certified appraisal and a brokers market analysis or price opinion? Back to top
A certified appraisal is a formal, impartial estimate or opinion of value, usually written, of an adequately described property,
as of a specific date, and supported by the presentation and analysis of relevant data. It is prepared as a result of a retainer,
for reliance by identified parties, and for which the appraiser accepts responsibility. Only a state certified appraiser can
provide a certified appraisal.
A comparative market analysis or brokers price opinion is an informal estimate of market value, based on comparable sales in
the neighborhood, performed by a real estate agent or broker. You can do your own cost comparison by looking up recent sales of
comparable properties in public records. These records are available at local recorder's or assessor's offices, through private
companies or increasingly on the Internet through such sources as Domania or Yahoo etc.
The most important difference between a certified appraiser and broker or real estate sales agent is their motivation.
A brokers typical goal is to obtain a listing and earn a commission. Although most brokers and agents are honest some might
tell you what they think you want to hear. A certified appraiser is independent and has no axe to grind. They have no ulterior
motives. Their only concern is to deliver a fair, accurate objective appraisal.
The following Items, will help your appraiser to provide a more accurate appraisal in a shorter period of time. Back to top
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 & specifications, The date
and purchase price you paid when you purchased the property; a list of recent improvements & cost as well as any other
information you feel may be pertinent.
The Appraisal Process Back to top
The appraisal process is an orderly and concise method of
reaching an estimate of value. The process has six major steps which include: definition
of the problem, preliminary survey and appraisal plan, data collection and analysis,
application of the three approaches to value, reconciliation's of value indications, final
estimate of defined value. This process assists the appraiser in reaching a sound
conclusion. The major phase of this process involves the application of the three
approaches to value which include the Market Data Approach, the Cost Approach and Income
Approach. The three approaches are reconciled and the value via most applicable approach,
in the opinion of the appraiser, is selected as the final estimate of value. In most
residential appraisals, particularly those of single or two family dwellings, the direct
sales comparison or market approach best reflects the actions of buyers and sellers and is
the most convincing and defendable approach to value.
The market or direct sales comparison approach to value Back to top
The market or direct sales comparison approach to an
estimate of value is a process of comparing market data, that is, prices paid for similar
properties, prices asked by owners, and offers made by prospective purchasers or tenants
willing to buy or lease. Typically a comparison grid is used and adjustments are made to
each of the comparable sales used for major differences between the comparable and the
subject property for such items as location, gross living or building area, lot size,
condition/effective age, market conditions, degree of remodeling, construction quality and
significant amenities, ie: fireplace, jacuzzi, in ground pool, garage, deck, patio, porch
and central air conditioning etc. In the market approach, the appraiser attempts to both
gauge and reflect the anticipated reaction by a typical purchaser to the subject property.
Comparable sales Back to top
A comparable sale is a property, that is similar to the
subject property in most respects, is located in a similar (nearby) location, and has sold
recently at arms length. The selection of comparable sales is in most residential
appraisals, the single most important determining factor in establishing value. It is the
appraisers responsibility to adequately research the local real estate market and
determine which comparable sales best represent the value characteristics of the subject
Arms length transaction Back to top
An arms length transaction is one in which both seller and
purchaser act completely independently of each other and have no connection or
relationship to each other.
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.
The cost approach to value Back to top
The cost approach combines an estimate of land value with an
estimate of depreciated reproduction or replacement cost of the improvements. The
principle of substitution is the basis of the cost approach, in that no rational person
will pay more for a property than the amount for which he can obtain, by purchase of a
site and construction of a building, with undue delay, a property of equal desirability
The income approach is based on an estimate of net income
from the operation of an income producing property and the selection of the property
capitalization rate from market indications of similar properties. The principle of
anticipation is the basis of the income approach and affirms that value is created by the
expectation of benefits to be derived from possession, operation and/or capital gain at
Highest & best use Back to top
Typically, highest & best use means the use or
utilization that provides the most profitable return on investment. It is that use,
selected from reasonably probable and legal alternative uses, which are found to be
physically possible, appropriately supported and financially feasible to result in the
highest possible land value.
What rules must appraisers follow? - Uniform Standards of Professional Appraisal Practice Back to top
Appraisal Standards Board (ASB)
The ASB sets forth the rules for developing an appraisal and reporting its results. In addition, it promotes the use, understanding
and enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).
FIRREA requires that real estate appraisals used in conjunction with federally-related transactions be performed in accordance with
USPAP. More than 80,000 state certified and licensed appraisers are currently required to adhere to USPAP. USPAP contains the
recognized standards of practice for real estate, personal property and business appraisal.
The authority of USPAP extends beyond FIRREA. Since 1992, the Office of Management and Budget (OMB) has required federal land
acquisition and direct lending agencies to use appraisals in conformance with USPAP.