Frequently Asked Questions
- What is an appraisal?
- Is there a difference between an appraisal and a home inspection?
- When is an appraisal report needed?
- Can I choose my own appraiser?
- What process does the appraiser use when determining value?
- What qualifications do you need to be a real estate appraiser?
- How long does an appraisal take?
- If my lender orders an appraisal for me, am I entitled to receive a copy?
- What is market value?
What is an appraisal?
An appraisal is an estimate of market value for a particular property as of a given date. It is the likely price that a typical buyer would pay for a property, given certain guidelines. Many people use the term “appraisal” to mean the physical report itself.
Is there a difference between an appraisal and a home inspection?
Yes. While an appraisal is an estimate of value, an inspection seeks to determine a home’s physical condition. While the appraiser’s responsibility includes determining “obvious” problems with a property, their primary purpose is to establish value.
When is an appraisal report needed?
For most, an appraisal is needed anytime a loan is secured on a property. This could be in the form of a purchase or a refinance of your home. Others may need the services of an appraiser for reasons such as:
*Determining a listing price for a potential sale
*Removal of Private Mortgage Insurance (PMI)
*Taxation appeal
*Estate settlement
*Divorce settlement
*Determining the value of a home prior to submitting an offer
*Condemnation proceedings
*Financial planning
*Litigation support/Court testimony
*Insurance purposes
*Employee relocation
*Miscellaneous consultation
Can I choose my own appraiser?
While most lenders have a “roster” of appraisers they work with routinely, most regularly accept reports from appraisers considered competent and certified by their respective state.
What process does the appraiser use when determining value?
Once your property has been inspected to determine it's features (i.e. # bedrooms, # baths, location, condition, quality of construction, etc...), an appraiser uses two (and sometimes three) approaches to value. These are: 1) the Cost Approach, 2) the Sales Comparison Approach and (if an income producing property) 3) the Income Approach.
The Cost Approach answers the question, "How much would it cost to build this home today?". After determining this replacement cost, the appraiser then determines how the home has aged. Since all homes age over time, an appraiser's way of determining this aging process is called depreciation. In theory, your home is worth what it would cost to build it today minus the accrued depreciation it has experienced since it was built.
The second approach is called the Sales Comparison Approach. It is the most widely accepted approach in determining value. Appraisers get to know the areas in which they work and they understand the value that certain features add to your home. After determining what makes up your particular home's neighborhood area, the appraiser researches recent sales activity to locate "comparable" sales that reflect the same location and characteristics as the home being appraised. The sales prices of these homes are then used as a basis to begin the Sales Comparison Approach. Using knowledge of the value of certain items such as square footage, bathrooms, fireplaces, etc..., the appraiser makes dollar adjustments to the sale price of the recent sales to determine the value of your home. For example, if the recent sale has a fireplace and the home being appraised does not, the appraiser may elect to deduct the value of the fireplace from the sales price of the recent sale. If the home to be appraised has an extra bathroom, the appraiser may elect to add a certain dollar amount to the recent sale to address this difference in amenities. After taking into consideration of all the adjustments for each recent sale, the appraiser arrives at a estimate of value for the home being appraised.
The third approach is the Income Approach. Since some properties generate income for their owners (i.e. apartment buildings, non-owner occupied single family homes, office buildings, etc...), the rental income received from these properties can be analyzed to determine value. For a purely owner-occupied residential property, this may not be applicable, but it can be important if the property is to be rented or otherwise used to generate income.
What qualifies a person to be a real estate appraiser?
All appraiser candidates must attend state approved courses and pass a state test. Then they must complete many hours of experience with a supervisory appraiser before they are considered competent under state law to perform an appraisal report independently. After these requirements are met, one can become a state certified residential appraiser (residential) or a certified general appraiser (residential/commercial). As an ongoing requirement, all appraisers must also attend “continuing education” classes to remain up to date on all appraisal procedures/concepts.
How long does an appraisal take?
The time taken to view your home and note its characteristics can take anywhere from thirty minutes to several hours, depending on the size of your property and complexity of the assignment. After the site visit, the appraiser then applies the three approaches to determining value and arrives at a final value conclusion. The total time frame from the client request to the completion and delivery of the report is typically 4-6 business days.
If my lender orders an appraisal for me, am I entitled to receive a copy?
Yes. The Equal Credit Opportunity Act states that a lender must provide the borrower with a copy if they request it in writing. Most local lenders routinely provide you with a copy of your appraisal in your closing packet.
What is market value?
Market value is formally defined as:
“the most probable price which a property should bring 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, and each acting in what he considers his own best interest; 3)a reasonable time is allowed for exposure in 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 concessions granted by anyone associated with the sale.”
