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written series: When I come

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© 2010 by Integra Realty Resources – South

Carolina

What is an Appraisal?

An appraisal is a thought process leading to

an opinion of value. This opinion or

estimate is arrived at through a formal

process that typically uses the three

”common approaches to value”. They are the

Cost Approach – which is what it would

cost to replace the improvements, less

physical deterioration and other factors,

plus the land value. There is the Sales

Comparison Approach – which 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.

Why would a person

need a home appraisal?

There are many reasons to obtain an

appraisal with the most common reason

being real estate and mortgage transactions.

Other reasons for ordering an appraisal

include:

• 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 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.

• Because a government agency

  such as the IRS requires it.

• If you are involved in a

  lawsuit.

What is the difference between a

residential 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,

and visible insulation; walls, ceilings,

floors, windows and doors; the foundation,

basement, and visible structure.

What is the difference between an

Appraisal and a Comparative Market

Analysis (CMA)?

Simply put, the difference is night and day.

The CMA relies on vague market trends. The

appraisal relies on specific, verifiable

comparable sales. In addition, the

appraisal looks at other factors like

condition, location and construction

costs. A CMA delivers a ”ball park

figure.” An appraisal delivers a

defensible and carefully documented opinion

of value.

But the biggest difference is 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.

What does the

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.

After completing the report, what

assurance is there that the value

indicated is valid?

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 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 insured 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 to estimate the value of real

estate involved in a loan transaction.

Appraisers also provide opinions in

litigation cases, tax matters and investment

decisions.

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. Flood

zone data is gathered from FEMA data

outlets, such as a la mode’s 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.

Why do I need a professional

appraisal?

Anytime the value of your home or other real

property is being used to make a

significant financial decision, an appraisal

helps. If you’re selling your home, an

appraisal helps you set the most appropriate

value. If you’re buying, it makes sure you

don’t overpay. If you’re engaged in an

estate settlement or divorce, it ensures

that property is divided fairly. A home is

often the single, largest financial asset

anybody owns. Knowing its true value means

you can the right financial decisions.

What exactly is PMI and how can I

get rid of it?

PMI stands for Private Mortgage Insurance.

It insures a lender against loss on homes

purchased with a down-payment of less than

20%. Once equity in the home reaches 20%

you can eliminate the PMI and start saving

immediately.

How do I get ready

for the appraiser?

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.

What is ”Market Value”?’

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.

Who Actually 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 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.

Which home renovations add the most

to the price?

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%.