An appraisal report is a summary of analysis leading to an opinion of value for the subject property.
There are three "common approaches to value" which assist the real estate appraiser in deriving their opinion or estimate. The most common approach in calculating the market value of a residential property is the Market (or Sales) Comparison Approach which utilizes a side-by-side comparison of multiple properties of similar appeal as the subject to calculate a value. Typically, this approach is the most widely used and often the most accurate indicator of value for a residental property.
The second method of valuation is the Cost Approach, which, like the name suggests, is what it would cost to replace or restore the improvements (house, garage, etc.), less physical deterioration, and adding the land value. The 3rd method, the Income Approach, is typically used for finding the value of income-producing properties based on what an investor would pay based on the amount of capital a property produces. An appraiser will consider all three approaches to value in every assignment, however, it is common that all three approaches will not apply or be necessary to completed. Each assignment contains unique components that factor into what approaches to value will be completed.
An appraiser is typically the only disinterested party in a real estate transaction and is tasked with providing an unbiased and professional opinion of the value of the subject property. This is achieved by conducting a market analysis of the subject's defined neighborhood and market area, researching market activity of properties determined to be competing with the subject property, and conducting an analysis of the subject property's features, quality of construction, and condition. All of these variables are reconciled into the appraiser's final estimate of the subject's value as it relates to the definition of market value utilized for the assignment.
The most common situations where an appraisal may be necessary include the following:
Pre-listing of a property
Property tax appeal
Private Mortgage Interest (PMI) release
Estate planning or settlement
Marital dissolution
As a negotiating tool when purchasing real estate
Mortgage financing/re-financing
To defend your rights in a condemnation case
A government agency such as the IRS requires it
Litigation or bankruptcy
Appraisers do not complete property inspections and are not home inspectors.
The point of a home inspection is to investigate the structure of the home and report on defiencies in structural integrity, remaining life and/or damage to components of the property, and make recommendations for repairs, if necessary. An appraiser is not trained or qualified to make these evaluations and is tasked with calculating the market value of the property based on a visual-only observation of the property. An appraiser will often use general assumptions about the functionality and structural integrity of the improvements, unless there are apparent signs of deficiency.
While an appraisal report and a CMA do share some similarities, the appraisal will typically contain a much more thorough analysis of the subject property, analysis of the defined neighborhood and market area, and use of market-derived adjustments when comparing the subject property to sales of competitive properties in the area. An appraisal must also adhere to the Uniform Standards of Professional Appraisal Practice (USPAP) and can only legally be performed by a certified appraiser. A CMA can be produced by any licensed real estate agent and does not adhere to any uniform standards of professionalism. An appraisal is also conducted by an unbiased 3rd party appraiser with no financial interest in the property while a CMA is typically produced by a licensed real estate agent who is typically paid a commission based on the sale price of a property. Depending on the circumstances and needs of the client, either product can be an effective tool for pricing a property.
The biggest difference between a CMA and an appraisal is that only a certified appraiser can legally produce an appraisal. Any licensed real estate agent can produce a CMA and theris 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, as well as any non-real estate items included in the transaction.
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 an intentionally 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).
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, proctored testing and practical experience. Once an appraiser is certfied, they are required to take continuing education courses in order to keep the certfication current.
Typically, appraisers are independent contractors who receive assignments from a variety of clients such as banks, mortgage lenders, attorneys, and private citizens. Some organizations have salaried staff appraisers and review appraisers who perform work solely for their direct employer.
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 subject property itself. Location, condition, amenities, size and other specific data are gathered by the appraiser during the walk-through observation.
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 past 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 could be beneficial. If selling a property, an appraisal could help to set an appropriate list price. If buying a property, it could ensure a proper contract price offering. If engaged in an estate settlement or marital dissolution, it could ensure an appropriate value for equitable division of the asset. A residence is often the single, largest financial asset someone will own. Gaining an understanding of its market value provides a stable foundation to make further financial decisions.
Private Mortgage Insurance insures a lender against loss on properties purchased with a down-payment of less than 20% of the sale price. Once equity in the home reaches 20% or more, the PMI can usually be eliminated from the loan payment. This typically requires sufficient demonstration to the lender of the equity in the property which can be calculated by accurately proving the market value of the property with an appraisal.
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.
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.
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.
The answer to this is different depending upon 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 in 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%.
Jamison Appraisal Services is always willing to talk to you about any questions you might have about appraisals in Berks County.
Feel free to contact us today.