Frequently Asked Questions?
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. For a more detailed description of the appraisal process click here: What is an appraisal?
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.
For more details on when you might need an appraisal click here: When to get an Appraisal
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, 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.
For a more detailed look at what goes into an appraisal report click here: Sample Appraisal Report
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. To see the specific requirements for any state click here.
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. For a detailed discussion of PMI and how to get rid of it click here: What is PMI and how to get rid of it
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%.
I am considering the purchase of a specific property. Should I hire an appraiser to help me establish a reasonable purchase price?
Absolutely. The purchase of real estate, whether a single-family home or an apartment building with dozens of apartment units, is a complex undertaking with substantial sums of money involved. Even if you are already familiar with the particular market in which the property is located, an appraiser will provide an unbiased expert opinion of value and can highlight important market information and trends that will guide you and give you confidence in making your purchase offer on the property.
I own a minority interest in a corporation that owns real estate primarily. I am considering selling my interest to my partners. Is a formal appraisal required to estimate the value of my minority interest?
The valuation of a minority interest in a real estate corporation involves unique factors in arriving at a fair estimate of market value. Most often, a discount will be taken to reflect the inherent characteristics of a minority interest. Determining this discount requires information and that can be difficult to obtain. It is an excellent idea to retain the services of an experienced real estate appraiser in order to ensure that you attain a fair price for your interest. Additionally, if a court is involved, it is almost certain that an appraisal will be required to determine the fair market value.
I own real estate and would like to transfer some or all of the ownership to my children for gift tax purposes. Do I need an appraiser?
In such situations, the IRS will most likely want to know that you are not artifically inflating or deflating the value of the real estate as reported. Unlike other property such as automobiles or gold, real estate is not a commodity with easily known value, as no two pieces of real estate are exactly alike. An appraisal will therefore normally be needed in order to determine the market value of the property for tax purposes. We will work closely with your accountant, attorney, or other tax professional and see to it that your interests are properly represented.
The real estate taxes I am being charged for my property are exceedingly high. Is there any way for me to get my property taxes lowered?
Do I need the services of an appraiser to help achieve this? With many areas throughout the country experiencing record levels of real estate property value increases during the past decade, many homeowners and other real property owners have seen their real estate taxes go through the roof. The processes through which municipalities assess and tax real estate is rather complex and involves many factors. While most municipalities make reasonable efforts to tax properties in a fair and uniform manner, tax assessments are far from an exact science and many properties are assessed at higher values than they should be, causing the property owner too pay more in taxes than appropriate. (Of course, plenty of properties are assessed too low, but we have yet to see any property owners complain about having that predicament.) In many such cases, a qualified appraiser (often working with a real estate attorney or other legal professional) can analyze the property assessments in question and show - based on various factors including the tax assessments of similar properties in the area - that in fact the real estate taxes should be lower. The results of this assessment appraisal can then be utilized as part of a legal proceeding to have the property taxes lowered. The resulting assessment changes may result in substantially lower real estate taxes for the property owner, saving thousands, tens of thousands, or even more money over the course of ownership.
I'm in the middle of a divorce and my spouse and I jointly own real estate. Should I hire an appraiser to protect my interests?
Absolutely. In many divorce cases, a home and/or other real estate forms the bulk of the couple's assets. When an estate must be split or other arrangements are required, it is vital to know just what the assets in question are worth. If a property is under- or over-valued, it may result in an unnecessary loss for a party to the divorce. A qualified real estate appraiser can give an accurate valuation of your property and ensure that property assets involved in the divorce proceedings are properly assigned value.
I'm facing foreclosure and/or bankruptcy and I want to be sure that I attain fair market values for my real estate holdings. Do I require the services of an appraiser?
Foreclosure and bankruptcy can be very stressful and unpleasant experiences. The last thing you need when facing such situations is to get shortchanged on the value of your property. A real estate appraiser can provide an accepted, professional opinion of value in the form of an appraisal and thereby help ensure that you get the full worth for your holdings.