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Appraisal Basics |
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An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights he intends to apprise.
The appraiser does not create value; the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to report, consideration must be given to the site and amenities as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning.
Considerable research and collection of general and specific data must be accomplished before the appraiser can arrive at a final opinion of value.
Due to the many types of value, such as Fair Market Value, Insurance Value, Tax Value and value in Use, the need to precisely define the purpose of the appraisal is essential. |
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Appraisal Methods |
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An appraisal is an opinion of value or the act or process of estimating value. This opinion or estimate is derived by using three common approaches, all derived from the market. They are:
- Cost Approach to value is what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the Physical Deterioration, the Functional Obsolescence and the Economic Obsolescence. The remainder is added to the Land Value.
- Comparison Approach to value makes use of the “bench mark” properties of the similar size, quality and location that have been recently sold. A comparison is made to the subject property.
- Income Approach to value is of primary importance in ascertaining the value of income producing properties and has little weight in residential type properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.
Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of vale is correlated. |
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When to Order an Appraisal |
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There many reasons to obtain an appraisal. The most common reason is for Real Estate and Mortgage Transactions, but we have compiled a list of other reasons you may need to order an appraisal. |
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- 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 help you make one of the largest financial decisions in your life
- 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
- to allow you to obtain a qualified appraisal report
- because a government agency such as the IRS requires it
- you are involved in a lawsuit
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Appraisal Needed to Obtain Loan |
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Usually, individuals applying for a loan are only interested in obtaining the loan and unfortunately are not worried about the prudence of buying the property at the agreed price. The majority of real estate appraisals are requested by mortgage companies to validate the property’s purchase price for loan purposes. Except for periodes of very low interest rates when everyone is refinancing, most loans are for the purchase of real estate and ordered after a sale price is negotiated. Purchasers mistakenly assume that mortgage companies are looking after their interest in the purchase transaction.
The law states that if the mortgage company orders the appraisal the appraiser is responsible only to the mortgage company. We expect mortgage companies to be prudent and they should be, but being prudent is protecting their interest, not necessarily the purchaser’s. The mortgage company’s position:
- It has two sources of repayment: the purchaser’s income and the property.
- The responsibility to repay the loan is not based upon the property’s value, so the purchaser is obligated to pay the note even if the property value declines to zero.
- The loan may be insured or guaranteed by a government agency
- The government does not promise to pay the purchaser’s debt if the property value is wrong
- If the loan is greater than 80% of the value, a portion of the loan may be insured by a private mortgage insurer.
- There is no decrease in risk for the purchaser regardless of the loan-to-value ratio. The investment by the purchaser is the same, a mixture of personal cash and a loan that must be repaid
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Help the Appraiser |
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Once you have selected an appraiser, be prepared to answer questions and provide requested information.
- What is the purpose of the appraisal?
- When is the required completion date of the appraisal?
- Is property listed for sale and if so, for how much and with whom?
- Is there a mortgage? If so, with whom, when placed, for how much, type of mortgage [FHA, VA etc], interest rate, and any other types of financing.
- What personal property, such as appliances is included?
- If it is an income-producing property, provide a break down of the income and expenses for the last year or two and a copy of leases.
- Provide a copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.
- Provide a copy of current real estate tax bill, statement of special assessments, balance owing and on what [sewer, water, etc.]
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