Why You May Need An Appraisal?

There are many reasons why you made need a real estate appraisal. The most common purpose for an appraisal is to obtain a mortgage on a home. Most lenders are required by federal and state laws, as well as current banking regulations, to obtain an appraisal in conjunction with most loans secured by real estate [mortgages] given by the lender.

Other common reasons for real estate appraisal's include appraisals made for insurance purposes, estate valuations, property tax assessments, for buyers, sellers, and relocation companies. More complex appraisals are required for most condemnation proceedings, partial takings, leasehold valuations, various commercial developments, and other related real estate activities.

This list is not complete, but it gives you an ideal of why over 5 million real estate appraisals are made each year.

Who Makes Real Estate Appraisals?

There are over 80,000 licensed and certified appraisers in the United States. Licensed appraisers are permitted to appraise only non-complex 1 to 4 family residential properties. Certified residential appraisers are certified for residential work only. Certified general appraisers are permitted to appraise any type of real estate. Licensing and certification is done at the state level, but must be based on national standards.

The Financial Institutions reform, Recovery and Enforcement Act of 1989 [FIRREA] requires that appraisals of property involved in federally related transactions be made by a licensed or certified appraiser. Some states require that all real estate appraisals be made by licensed or certified appraisers.

What Is A Real Estate Appraisal?

In non-technical terms, an appraisal is an objective, supported opinion of the value of an adequately described piece of property, made by a person who has sufficient knowledge and experience to accurately estimate its value.

Appraisers use comparable sales, rental information and listing data, plus information about the property being appraised [the subject property], its neighborhood, community, and region, and the local and national economy, to support their value estimates.

Types of Real Estate Appraisal

Complete appraisals: Conform to all of the Uniform Standards of Professional Appraisal Practice. They are the most accurate appraisals.

Limited appraisals: Omit portions of the appraisal process and are therefore less reliable than complete appraisals.

The Valuation Process

The appraisal profession has been organized in the United States for over fifty years. It has developed an accepted standardized method for making a real estate appraise, which is commonly knows as: The Valuation Process.

This process recognizes that every piece of real estate is unique, and that the type of value to be estimated must be determined by the needs of the client.

The most common type of appraisal is for mortgage purposes. These appraisals usually require an estimate of the property's "Market Value", while appraisals for insurance purposes estimate a property's "Insurable Value"

Definition of The Appraisal Process

The first steps of the appraisal process are to identify the property to be appraised, and determine which property rights are involved, the use the client will make of the appraisal, the value to be estimated [together with a definition of this value], and the effective date of the appraisal, as well as any underlying assumptions and limiting conditions that apply.

The Data Collection and Analysis

Next, the appraiser makes a plan to collect and analyze general information about the market and the governmental regulations and environmental forces that affect the value of the property.

This will provide the background against which the specific data will be analyzed. Specific data includes information about the subject property site and improvements [the land and buildings or other structures], and the comparable data on properties which have sold, rented or are listed for sale [comparable sales, comparable rentals, or comparable listings].

Highest and Best Use Analysis

"Highest and Best Use Analysis" is an important step in the process of estimating the value of any property. The appraiser must first estimate the Highest and Best Use of a property, assuming the site is unimproved and vacant [even if it is improved and occupied]. They identify that use which, in their opinion, would be the best development of the property in terms of its total worth.

They do a second Highest and Best Use analysis of the property as it is actually improved to identify what could be done to the existing improvements to make the property more valuable. For example, the property might be improved with 1000 square foot, two bedroom, one bath, ranch house. The appraiser may conclude that the Highest and Best Use of the property is a 1400 square foot ranch house with three bedrooms and two baths, and the property is under-improved. It may or may not be possible to [economically] alter the property to its Highest and Best Use.

Site Valuation

Accepted appraisal methodology requires that a separate site value be developed in every appraisal. when actual sales of comparable sites are available, they provide the most reliable basis for making the site value estimate.

Three Approaches to Value

1. The Cost Approach: The Coast Approach is based upon the assumption that there is a relationship between what it costs to acquire a site and build a particular structure on it, and the market value of the improved property. when the value of the improvements is less than their cost, the lost value is called by depreciation, which is divided into 3 major categories:

Physical Deterioration: the loss of value due to age and condition
Functional Obsolescence: the loss of value due to poor design, deficiencies and over-improvements or under-improvements.
External Obsolescence: a loss of value caused by something off the site, which nevertheless adversely affects it, such as a nearby hazardous waste site.

The use of the Cost Approach is more significant when good comparable sales data is NOT available. It is easier to use on newer properties in good conditions, where there is little depreciation. It is not particularly applicable for older properties which may suffer from very significant depreciation which can be difficult to estimate.

2. The Sales Comparison Approach: This method compares the property being appraised to other similar nearby properties that have recently sold or are currently listed for sale. When good data is available, the results obtained by this approach are the most satisfactory and also the easiest to understand.

Since no two properties are exactly alike, the appraiser must make adjustments for significant differences between the comparable sales and the subject property.

There are four categories of adjustments:
1. A time adjustment, to reflect market differences between the date of the appraisal and the compatible's date of sale
2. A location adjustment, to reflect value differences between the location of the subject and the location of each comparable sale
3. Adjustments for differences in physical characteristics between the subject and the comparable sales, such as size, condition, special features, amenities, etc.
4. Adjustments, if needed, for special conditions or special financing that might have influenced the selling price of the comparable.

A sales comparison value estimate decreases in reliability if there are many differences between the subject property and any of the comparable sales.

3. The Income Approach: The Income Approach is used in estimating the value of single family residences as well as properties owned primarily for their investment value.

When it is applied to small residential properties, the Income Approach is based on comparing monthly rentals of similar properties which have sold, and estimating a monthly market rental for the subject property. The ratio between the rent and the sales price of similar properties is used to estimate the value of the subject property.

When it is used in the appraisal of investment properties, this approach begins with an estimate of the market rent for the subject property, deducting all fixed and operating expenses to yield what appraisers call the Net Operating Income [NOI]; not included are deductions for depreciation or mortgage interest and amortization. The last step in applying the Income Approach converts NOI into value by using a appropriate capitalization rate or factor. This conversion process can be complex and is the subject many books and articles.

Another Income Approach technique is known ad Discounted Cash Flow Analysis, which converts the estimated future income of a property into an estimated of present value.

Reconciliation of Value Indications
- The Final Value Estimate -

Throughout the valuation process, the appraiser analyzes and reconciles the collected data to arrive at conclusions regarding the final value estimate. In the final reconciliation, the appraiser considers all the available data and uses their knowledge, experience and professional judgment to estimate a final value for the subject.

Appraisal Report: The final step of the valuation process is the preparation of an appraisal report.

Complete appraisal reports are usually in narrative format and contain, in addition to the estimated value, many details about how the appraiser arrived at the value as well as supporting maps, charts and photographs.

Summary appraisal reports are often on forms designed to meet the needs of the client and contain the value estimate plus a summary of the important information about the appraisal.

Restricted appraisal reports may be very short. They are intended only for a specific use by a single client, who understands that such reports do not contain sufficient information to be understood without the supporting data retained in the appraiser's files.