Why a Real Estate Appraisal?
There are many reasons why you need a real estate appraisal. Reduce property taxes,
probate, estate planning, divorce settlements are some. The most common one is to obtain a
mortgage.
Most lenders are required by federal and state laws and current banking regulations to
obtain an appraisal for most loans secured by real estate. As of Jan. 1, 1993, all
appraisals made for mortgage loans from federally insured lenders and other federally
related transactions must be made by a licensed or certified appraiser.
What is a Appraisal?
An appraisal is an objective supported opinion of value of an adequately described piece
of property made by an appraiser who has sufficient knowledge, training and experience to
accurately estimate its value. In this detailed and time consuming report, appraisers use
comparable sales together with information about the property being appraised, its
neighborhood and community along with the local and national economy, to support the
appraised value.
Look Objectively not Subjectively
The most important thing you can do when previewing is to look at the house as if empty:
four walls, floors and a roof.
Don't let the current owners' furniture and decor influence you.
Important Tip!
If you are buying a house with the owner carrying the paper (loan), it is well worth the
cost to hire an appraiser to make sure you don't pay more than it is worth. For your
protection many real estate agents will write in a purchase contract: this contract is
contingent upon the property appraising for the sales price.
How is Value Established?
The value of a house is based upon recent sales of the similar neighboring homes in the
market as well as rentals and listing data. Ideally, appraisers want to use sales of
properties of the same size, age, room count, condition and with similar amenities and
external influences. This rarely happens though, so adjustments have to be made, based on
what people will pay extra for.
Examples: extra square footage, bedrooms, fireplace, upgrading, parking facilities,
swimming pool, lot size, location and so on. To help get a better picture, this
information is entered on a form, a value for differences is established and comparisons
are made to the subject property. A minimum of three verified closed sales with photos are
required to establish a value.
Houses Appraise for More When:
- Well maintained inside and out
- Located in a good school district
- Additions are done with the proper building permits
- Additions conform with and fit well into the existing house
- Properties throughout the neighborhood are well maintained
- Not over improved or the largest house on the block
- Style of the house conforms with those in the neighborhood
- Zoning changes are not expected or there is not a mixed use
Remember: Location, location, location.
You can change everything about a house except it's location.
What is Poor Location?
- Located on a feeder street
- Under an airport flight path
- In or near a gang territory
- Center of night life activities
- In a rundown block or neighborhood
- Next to a school or school yard playground
- Next to apartments or commercial property
- In close proximity to a freeway, expressway or railroad
- Next to a gas station, near a municipal garbage or toxic waste dump
- Odors from factories, farms and processing plants are routinely noticed
- The city is affected by the closing of a major employer
Think about Selling - When You are Buying
Location is a big factor in a home's appraised value. This is most notably felt at the
time you sell or refinance. What seems like a bargain when you buy might turn into a real
headache when you try to sell. Drive around the neighborhood and note any adverse
conditions. You may think you can live with something adverse for the price, but when it's
time to sell you might find buyers won't.
Important Tip!
Adding onto your house = Always obtain a building permit. A 600 square foot addition built
without a permit is given no value on an appraisal. When it is time to sell or refinance,
the frustrations of the building permit process will be worth it. Always save copies of
the final permit sign offs and keep with your house papers.
Buying a House with an Addition?
Verify that it was built with a permit prior to closing the sale. Don't just accept the
sellers word. Get copies of the permits before final sign off. Should you want to
refinance or sell at a later date, and the appraiser cannot verify the addition being
permitted, no value should be given. The result: no new loan or worse . . . no sale.
Tip: A one bedroom house or condominium doesn't appreciate as well and is harder to sell.
Work with An Agent
An advantage of working with a real estate agent is that they can provide you with sales
information of similar properties to better guide you on how much to offer. Your agent can
provide recent sales "comps" for similar homes in the neighborhood. Finding the
list prices is also important. Comparing the list prices with the sale prices tells you
exactly what percentage of the list price sellers are getting.
Appraisal Basics
An appraisal of real estate is the valuation of the
rights of ownership. The appraiser must define the rights he intends to appraise.
The appraiser does not create value, the appraiser
interprets the market to arrive at a value estimate. As the appraiser compiles data
pertinent to a 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.
Appraisal Methods
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 other "bench mark" properties of 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 value is correlated.
When to Order an Appraisal
There are 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:
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.
Home's Market Value
In the real world, very few individuals order appraisal
reports to establish an offering price or to substantiate a purchase price. At the point
that an offer to purchase (in a typical residential transaction) is made, the price has
been set by other parties, not the purchaser. The price has been determined by the seller,
who wishes to obtain the highest price possible, or the agent, who receives a percentage
of the price as compensation and often represents the seller in the transaction.
The real estate agent will typically perform a
comparative market analysis (CMA). The appraisal laws in most states allow real estate
agents to perform CMAs without an appraiser's license or certification. 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. The reliability of the CMA depends
upon the agent's experience and the characteristics of the property. The agent will
suggest a selling price to the seller based upon the analysis. However, neither the seller
nor the agent are bound by the results of the analysis, and the agent is not required to
follow any formal procedure in completing the CMA. If a seller wishes to list the property
at a price higher than the price suggested by the agent, then the agent may be forced to
accept the listing at that price or risk losing a commission.
Purchasers believe that they are getting a good deal if
they make an offer lower than the listed price. But how far above the market value was the
property listed? 10%, 15%, maybe even 20% above the fair market value? A negotiated price
of 10% less than the listed price on a property that was listed at 20% above its value is
not a bargain. The agent cannot tell the purchaser that the offered price is higher than
the value, or even higher than their own CMA. In most states, they must submit the offer
to the seller.
The seller of a property may want to order an appraisal
before listing the property. Of course, the cost of the appraisal is always a deterrent,
especially if the seller knows that a buyer will pay for it when applying for a loan. But
the appraisal is often justified. The seller could lose a sale if the property appraised
for less than the sale price when appraised by the appraiser.
Appraisal To Obtain
Loan
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. In fact, many purchasers will try to encourage
appraisers to increase the appraised value so that they can purchase the home regardless
of its value.
The majority of real estate appraisals are requested by
mortgage companies to validate the property's purchase price for loan purposes. Except for
periods 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 interests 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.
Helping the Appraiser
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, are included ?
If it is an incomeproducing property, provide a
breakdown of 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.].
