APPRAISAL

 

What is an appraisal

A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.

An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receive - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.

The Inspection
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the house.

Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.

Cost Approach
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.

Sales Comparison
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Reconciliation
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money that the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate.

Appraiser Ethics
Appraisal is a profession, and appraisers are professionals. In our field as with any profession we are bound by ethical considerations.

An appraiser's primary responsibility is to his or her client.  Normally, in residential practice, the appraiser's client is the lender ordering the appraisal to decide whether to make the mortgage loan.  Appraisers have certain duties of confidentiality to their clients -- as a homeowner, if you want a copy of an appraisal report, you normally have to request it through your lender -- obligations of numerical accuracy depending on the assignment parameters, an obligation to attain and maintain a certain level of competency and education, and must generally conduct him or herself as a professional.  Here, we take
these ethical responsibilities very seriously.

Appraisers may also have fiduciary obligations to third parties, such as homeowners, both buyers and sellers, or others.  Those third parties normally are spelled out in the appraisal assignment itself. An appraiser's fiduciary duty is limited to those third parties who the appraiser knows, based on the scope of work or other written parameters of the assignment.

There are ethical rules that have nothing to do with clients and others.  Appraisers must keep their work files for a minimum of five years. 

We only perform to the highest ethical standards possible.  We don't do assignments on contingency fees.  That is, we don't agree to do an appraisal report and get paid only if the loan closes.  We don't do assignments on percentage fees.  That is probably the appraisal professionís biggest no-no, because it would tend to make appraisers inflate the value of homes or properties to increase their paycheck.  We don't do that.  Other unethical practices may be defined by state law or professional societies to which an appraiser belongs.

The Uniform Standards of Professional Appraisal Practice (USPAP) also defines as unethical the acceptance of an assignment that is contingent on "the reporting of a pre-determined result (e.g., opinion of value)," "a direction in assignment results that favors the cause of the client," "the amount of a value opinion," and other things.  This means you can be assured we are working to objectively determine the home or property value.

 

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