Frequently Asked Questions
What is an appraisal?
An appraisal is a thought process leading to an opinion of value. This opinion or estimate is calculated through a formal process that typically uses the three common approaches to value.
The Cost Approach is what it would cost to fix issues, add improvements and updates, and other factors plus the value of the land.
The Sales Comparison Approach 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.
What does an appraiser do?
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.
What does an 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.
Who 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 homeowner engages an appraiser directly. In these cases, the appraiser may stipulate how the appraisal can be used, such as PMI removal, estate planning, or tax challenges. If not stipulated otherwise, the homeowner can use the appraisal for any purpose.
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. And most importantly, the appraiser gathers general data from his or her past experience in creating appraisals for other properties in the same market.
What assurance is there that the value indicated is valid?
In communicating the 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 ensured 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 or private homeowners to estimate the value of real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters and investment decisions.
Why would someone need an appraisal?
There are many reasons to obtain an appraisal. The most common reason involves real estate and mortgage transactions. Other reasons for ordering an appraisal include, but are not limited to:
- Obtaining a loan.
- Lowering your tax burden.
- Establishing the replacement cost of insurance.
- Contesting high property taxes.
- Settling an estate.
- Providing a negotiating tool when purchasing real estate.
- Determining a reasonable price when selling real estate.
- Protecting your rights in a condemnation case.
Why do I need a professional appraisal?
Any time the value of your home or other real estate property is being used to make a significant financial decision, an appraisal works in your favor. If you’re selling your home, an appraisal helps you set the most appropriate value. If you’re buying, it ensures you don’t overpay. If you’re engaged in an estate settlement or divorce, an appraisal helps divide the property fairly.
A home is often the single, largest financial asset anyone owns. Knowing its true value means you can make the right financial decisions.
How do I get ready for an appraisal?
The first step in most appraisals is the in-person home inspection. During this process, the appraiser will come to your home, 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 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, visible insulation, walls, ceilings, floors, windows and doors, foundation, basement, and visible structure.
What is market value?
Market value, or fair market value, is the most probable price that a property should sell for in a competitive and open market under all conditions requisite to a fair sale.
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.
Which home renovations give the most return on investment?
The answer to this depends on 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% of investment value.