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What is a Real Estate Appraisal? The Answers are Enclosed

February 17, 2010

What is an Appraisal?I am Lisa the author of this article and the wife of an appraiser.
An appraisal is actually a process that results in an “opinion of value” of a property’s fair market value. An Appraisal can be conveyed as a single value or range of values, verbally, or in written form as an appraisal report. An appraisal is generally required by a lender before loan approval is given, to ensure that the mortgage loan amount is not more than the value of the property. An “Appraiser” is the only qualified individual who is licensed and specifically trained to render expert opinions concerning real estate or property values. An appraiser must undergo a significant amount of education, training, and 2000+ internship hours prior to getting licensed. In an appraisal, consideration is given to the whole property: it’s location, amenities, and the physical condition of the land, house or any other structures present. What we typically see is the “Appraisal Report” which is the end result of the entire Appraisal Process.

Why get an Appraisal?
The most common reason for ordering an appraisal is to obtain a loan on a property. However, there are several other reasons why an appraisal might be needed. Below are just a few:
• Establish the replacement cost (insurance purposes).
• Contest high property taxes or assessed values.
• Divorce settlement or lawsuits
• Settling of an Estate.
• Use as a negotiation tool (in real estate transactions).
• Determine a reasonable or most probably price when marketing real estate.
• Protect your rights in an eminent domain case.
• Government agencies may require it.
• Removing PMI (Private Mortgage Insurance)

What are the Appraisal Methods?
Appraisers use three common approaches when establishing the opinion of value for a given property:

1 Sales Comparison Approach: In this approach the Appraiser identifies a minimum of 3 or more comparable homes in the subject neighborhood which have recently sold. Ideally, the properties are close in proximity (within a 1/2 mile radius of the subject property) and have sold within the previous six months. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include location, square footage, number of bedrooms and bathrooms, construction style, age, lot size, view, interior or exterior amenities and the home’s condition.

2 Cost Approach: In this approach the Appraiser estimates the cost of construction by either the Replacement Cost New or Reproduction Cost. The cost is derived by first estimating the site value then adding the cost of new construction. From there the Appraiser subtracts the estimated accrued depreciation of the building in comparison with a new building. The end result is the value estimate using the cost approach. This method is used most commonly in new construction and in combination with the sales comparison approach.

3 Income Approach: In this approach the potential net income of the property is capitalized using a rather complex mathematical process to arrive at a property value. This approach is suited to income-producing properties and is usually used in conjunction with the other valuation methods. The process of converting a future income stream into a present value is known as capitalization.

After thorough exercise and consideration of the three approaches, a final estimate or opinion of value is conveyed in the “Appraisal Report”. When evaluating single-family, owner-occupied properties, an Appraiser usually places the most weight on the sales comparison approach.

Who owns the Appraisal?
Even though the borrower typically pays for the appraisal, the Mortgage Company is the Appraiser’s “Client” and the entity that owns the appraisal. Because the Mortgage Company orders the appraisal on the borrower’s behalf the Appraiser lists that mortgage company’s name on the appraisal report as the “client” or “intended user”. However, laws state that the borrower has the right to receive a copy of the appraisal if used for a mortgage transaction.  The Appraiser is not expected to nor can he legally release the appraisal to anyone but the client.

Can I use a different mortgage company after the appraisal has been completed ?
Yes. In most cases, changing your mortgage company does not mean you will have to pay for another appraisal. Legally the first lender can transfer the appraisal to your new lender. Being as they are the owner of that appraisal, the original lender has the right to refuse to transfer the appraisal to another lender. However, lenders sometimes require their company name to be the one listed as the “Client”. In this event, you will need to get a new appraisal. Sometimes that new lender will request from the original Appraiser that the report be transferred to their name. Due to regulations, the Appraiser must treat this instance as a “new appraisal assignment” because a new “Appraiser / Client” relationship has now been formed. Many appraisal firms charge a small fee for this because there is a significant amount of clerical work and time involved in preparing an appraisal to reflect the new client or Mortgage Company.  This fee is sometimes referred to as an “Appraisal Retype Fee.” All Appraisers are bound by strict Ethics Provisions and Regulations that prevent them from simply changing the name or client information on an appraisal and re-releasing it. All Appraisers are subject to USPAP (Uniform Standards of Professional Appraisal Practice) which are basically their guidelines and regulations. As of May 2009 the new Home Valuation Code of Conduct, HVCC drastically changed how appraisals are assigned and transfered. It is less likely now that you can get your appraisal assigned if you have to change lenders due to the private 3rd party Appraisal Management Company or AMC they are originally ordered with.  But it is nothing you or I can change it will take an act of new legislation…

Who determines the price of a property?

The seller or owner of the property is typically the person who sets the PRICE of the property (specifically residential property), and not an Appraiser. This is because most sellers normally do not order an appraisal when getting ready to market their homes. Sellers often wish to obtain the highest possible selling price for their homes and may not want to be bound by the appraiser’s opinion of value of their home. A Realtor (real estate agent), who receives a commission percentage of the selling price as compensation and often represents the seller in the transaction, normally assists the seller in setting the sale price.

The real estate agent performs a comparative market analysis (CMA). Real estate agents can perform a CMA without an appraiser’s license or certification because a CMA is not considered an appraisal. A CMA is a necessary part of the agent’s preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price, not a market value. The reliability of the CMA in determining a reasonable price depends upon the agent’s experience and the characteristics of the property and the surrounding area. Typically, the agent will suggest a selling price to the seller based upon their analysis. However, the seller may not accept that price and choose to list the property for a higher price.

Assisting the Appraiser
In order for the Appraiser to perform his/her job properly there might be requests for additional information. Some information that may be requested is as follows:
• What is the purpose of the appraisal and who is the intended user?
• Is the property listed for sale, and if so, for how much and with whom?
• Is there a mortgage on the property right now? If so, the Appraiser will need to know the name of the mortgage company, when the mortgage was obtained, for how much, what type of mortgage [FHA, VA etc.], interest rate, or any other type of financing?
• What personal property, such as appliances, is included in the sale?
• For an income-producing property, a breakdown of income and expenses for the last year or two and a copy of the lease or rental agreements are often required.
• Provide a copy of deed (including legal description), survey (plat map), 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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