What Is An Appraisal?

An appraisal is an opinion of value or the act or process of estimating value.  This opinion is derived by using one, two or all three common approaches.  These approaches are the comparison approach, cost approach and income approach.

• Comparison Approach to value makes use of other "bench mark" properties of similar size, quality and location that have recently sold.  A comparison is made to the subject property and monetary adjustments are made to reflect differences in the properties.  The comparison approach is by far the most relied upon approach.
• 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 depreciation, functional obsolescence and or economic obsolescence plus the land value.
• Income Approach to value is of primary importance in ascertaining the value of income producing properties.  This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces

What Does an Appraiser Do?

Common Misconception - Most people know very little about the appraisal process or what an appraiser really does during the appraisal process.  To illustrate, a typical homeowner sees an appraiser as someone who shows up for a ten minute walk-through of the property, collects three hundred bucks (or more), and calls the lender with a personal opinion of the value of the owner's home.  If the appraiser likes the house, the loan is reality, otherwise not.  In fact, the Appraisal Process requires a professional organized sequence of events which result in improved value to the all parties involved.

The Walk-Through - Home inspections include both exterior and interior observation and measurement.  So even if the appraiser is only inside your home for ten minutes, he or she may have spent five to twenty minutes outside.  In fact, most home inspections last from thirty minutes to an hour.  The experienced appraiser may have inspected homes with your type of floor plan on scores of occasions.  Thus with a few precise measurements, he/she can quickly gather enough information to render an accurate scale drawing of your home, complete with placement of interior walls.

Things That Are Considered - The home's overall condition reflects the quantity and quality of ongoing maintenance, as well as any functional or external inadequacies.  These are apparent to a trained eye.  Functional inadequacy results from such things as an out-of-date kitchen, a bedroom or main bathroom accessible only through another bedroom, or an over-improvement such as an in-ground swimming pool or a second family room.  Location close to a noisy freeway is an example of an external inadequacy.

Preliminary Research - The walk-through is only the tip the iceberg.  The appraisal process begins with a telephone (or in-person) interview with you about your home.  There's also a thorough review of recent home sales and listings in your particular neighborhood.  In the language of appraisal, these sales and listings are called 'comps', short for comparable properties, and your home is referred to as the 'subject'.  If the appraiser knows in advance that there is something unique about your home, such as a finished basement area or design by a historically significant architect, additional research will have been done to find homes exhibiting that characteristic.

Additional Research - The appraiser, at this point, now has (a) made a sketch of your home, (b) computed its size, and (c) noted its salient characteristics.  The appraiser's now in a position to select an appropriate supply of comps from the data already collected.  Now, if it turns out that during the inspection process, the appraiser learns something that would affect the value of your home, a return visit to the office for more research may occur.  In any event, the appraiser then drives by all possible comps for the purpose of exterior inspection, making notes on condition and location and photographing them.  Returning to the office, phone calls are made to agents and other parties involved in these transactions to confirm observations or gather additional information about the properties and / or financial aspects of the transactions.  Often, property information from several sources is in conflict and it is the appraiser's task to determine the true state of affairs by means of research, experience, and good judgment.

Coming Up With the Home's Value - A detailed report is written by the appraiser.  This document contains several addenda including (a) copies of parcel and neighborhood maps, (b) photographs of your home, and (c) the best comps available (at least three and usually four or five are required for a well-supported argument in favor of the appraised value).  Every effort is made to substantiate the appraiser's opinion of market value.  This value conclusion is not based in any way on the personal or architectural preferences of the appraiser.  Rather, it is a carefully reasoned value based on recent real estate activity of properties similar to yours.  If homes like yours are selling well at good values, you should have a relatively high appraised value.  If not, the market is saying something else to you.  A good appraisal is an unbiased report by a disinterested professional of how current and recent buyers and sellers would value your home were you to place it on the market.

The Life Cycle of the Appraisal Report - The completed appraisal is packaged and sent to the mortgage agent, along with three sets of photographs.  At this point, the appraisal package takes on a life of its own.  (Note: skill levels among appraisers differ markedly, thus it's always wise to personally read the appraisal report when it becomes available.)  During its life, which is typically three months, the appraisal report may be subjected to minute and hostile examination by any one of several lenders and their staff reviewers.  The sole purpose of the reviewer may be to uncover inflated appraised values presented for the purpose of obtaining what, in their view, would be dangerously high loan amounts.  For this period of time, the appraiser may have to answer inquiries from several lenders about any aspect of the report.  These answers may be by telephone but are usually required in writing and can be quite extensive. These inquiries may contain erroneous information.  The only way to deal with them properly is to spend the time and effort required to research and refute the data point by point in a lengthy letter, thereby ensuring the borrower the best chance of securing the requested loan.

The Relationship Between Appraiser and Loan - A concerned and well-informed appraiser can often be the difference between a perfectly good loan application being accepted or rejected.  This is especially true during periods of sudden fluctuation in financial markets which may prompt lenders to peruse loan applications with extreme caution in response to short term financial restrictions.  For the appraiser with professional pride and a commitment to customer service, the time spent fielding these requests during the loan process is just as much a part and cost of doing business as the appraisal process itself.  It should be noted that the appraiser can only adequately defend an appraisal that has been properly researched and reasoned in the first place.  A value that starts out too high, for instance, cannot be defended and in most cases will not result in a loan.

Hidden Appraiser Costs - Appraisers have several operating costs which may not be obvious to the typical homeowner.  First, state licensing and ongoing education requirements require continual outlays of time and money.  Another required expense includes Errors and Omissions insurance to deal with legal suits brought by both borrowers and lenders.  Further fees are required for both on-line and in-house information services such Multiple Listing Service for current market data, and Metroscan or TRW-REDI for parcel maps, census tract information, and sales confirmation.  Acquiring other material (printed or electronic) is also necessary for maintaining a variety of information products.  Occasional trips to local building departments to check for permits can be very time consuming, but these trips too are part of the job.

Summary - Looking at the appraisal process as a whole, it is clear that it takes many hours and can extend over several months with the appraiser as the defender of his / her opinion of value and sometimes the champion of the borrower.  In the end, a good appraiser wants to work with the borrower to ensure the accurate description of all factors which may contribute to value.  It may be helpful to think of the appraiser as an unbiased professional who can be of great benefit in obtaining a well-secured loan.  We all have a natural economic self-interest and sentimental attachments which can make it impossible to see the actual value of our home.  The appraisal can provide us with accurate information on the value of our property which may be of great benefit in future financial planning - and provide true value to the parties involved!

Are real estate appraisals really necessary?

The Importance Of A Professional Real Estate Appraisal
Because much private, corporate, and public wealth lies in real estate, the determination of its value is essential to the economic well-being of society.  It is the job of the professional appraiser to determine these values by gathering, analyzing, and applying information pertinent to a property.  Unquestionably, the professional opinion of the appraiser, backed by extensive training and knowledge, influences the decisions of people who own, manage, sell, purchase, invest in, and lend money on the security of real estate.  And because the appraiser is trained to be an impartial third party in the lending process, this professional serves as a vital "check in the system," protecting real estate buyers from overpaying for property as well as lenders from over lending to buyers.

What Qualifies someone to be an Appraiser?

Appraiser Qualifications
Real estate appraisers are required to be, at a minimum, state licensed or state certified and have fulfilled rigorous education and experience requirements and must adhere to strict industry standards and a professional code of ethics as promulgated by the Appraisal Foundation.

What is the difference between a short form report and the more traditional "Fannie Mae" (URAR) Uniform Residential Appraisal Report and other "lender" orientated reports?

A "Fannie Mae" - URAR form report has many items required by the secondary mortgage lending market, that are not necessarily needed in a simple report to find the market value.  Both primarily rely on a direct sales comparison or market approach with a comparison grid (see below) to determine the market value of the subject property.  The lenders report has many additional arbitrary requirements which have little bearing on the value found by a report needed for many other purposes.  The traditional "lender" reports need census tract & smsa information for tracking lending patterns.  Some lender reports require a lot of the appraisers effort to determine and substantiate how much additional rental income is available to support a higher mortgage.  In addition, a great deal of detail is required to help the lender determine what if any, necessary repairs might be needed before the property meets their underwriting requirements.  All of these things and much more, may be quite important for a lender, but probably are useless for most people, who just want to know what a property is worth for a variety of reasons.

Our short form reports are particularly well suited for helping a seller to price a home for sale, helping a buyer to decide how much to offer or pay for a home, for estate tax, gift tax, tax grievance, uncontested divorce & most any other potential use other than for obtaining a mortgage or in litigation where the report will be used in conjunction with expert testimony.  Why should you have to pay for more of a report than you really need?

Can I get a copy of an appraisal a lender ordered on my home?

Know Your rights in the appraisal process!
Under the Equal Credit Opportunity Act, your lender must provide you with a copy of the appraisal report upon your written request.  If you are dissatisfied with any information contained in your appraisal report, you should contact your lender immediately.

Is there anything I can do to speed up the process?

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 & specifications, The date and purchase price you paid when you purchased the property; A list of recent improvements & cost as well as any other information you feel may be pertinent.

What constitutes a typical appraisal?

The appraisal process is an orderly and concise method of reaching an estimate of value.  The process has six major steps which include: definition of the problem, preliminary survey and appraisal plan, data collection and analysis, application of the three approaches to value, reconciliation of value indications, final estimate of defined value.  This process assists the appraiser in reaching a sound conclusion.  The major phase of this process involves the application of the three approaches to value which include the Market Data Approach, the Cost Approach and Income Approach.  The three approaches are reconciled and the value via most applicable approach, in the opinion of the appraiser, is selected as the final estimate of value.  In most residential appraisals, particularly those of single or two family dwellings, the market or direct sales comparison approach best reflects the actions of buyers and sellers and is the most convincing and defendable approach to value.

What is the Market or Direct Sales Comparison Approach to Value?

The market or direct sales comparison approach to an estimate of value is a process of comparing market data, that is, prices paid for similar properties, prices asked by owners, and offers made by prospective purchasers or tenants willing to buy or lease.  Typically a comparison grid is used and adjustments are made to each of the comparable sales used for major differences between the comparable and the subject property for such items as location, gross living or building area, lot size, condition/effective age, market conditions, degree of remodeling, construction quality and significant amenities, i.e.: fireplace, jacuzzi, in ground pool, garage, deck, patio, porch and central air conditioning, etc..  In the market approach, the appraiser attempts to both gauge and reflect the anticipated reaction by a typical purchaser to the subject property.

What is a Comparable Sale?

A comparable sale is a property, that is similar to the subject property in most respects, is located in a similar (nearby) location, and has sold recently at arms length.  The selection of comparable sales is in most residential appraisals, the single most important determining factor in establishing value.  It is the appraisers responsibility to adequately research the local real estate market and determine which comparable sales best represent the value characteristics of the subject property.

What is an Arms Length Transaction?

An arms length transaction is one in which both seller and purchaser act completely independently of each other and have no connection or relationship to each other.

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.

What is the Cost Approach to Value?

The cost approach combines an estimate of land value with an estimate of depreciated reproduction or replacement cost of the improvements.  The principle of substitution is the basis of the cost approach, in that no rational person will pay more for a property than the amount for which he can obtain, by purchase of a site and construction of a building, with undue delay, a property of equal desirability and utility.

What is the Income Approach to Value?

The income approach is based on an estimate of net income from the operation of an income producing property and the selection of the property capitalization rate from market indications of similar properties. The principle of anticipation is the basis of the income approach and affirms that value is created by the expectation of benefits to be derived from possession, operation and / or capital gain at resale.

What does Highest & Best Use mean?

Typically, highest & best use means the use or utilization that provides the most profitable return on investment.  It is that use, selected from reasonably probable and legal alternative uses, which are found to be physically possible, appropriately supported and financially feasible to result in the highest possible land value.

What are some Common Residential Appraisal Reports?

Fannie Mae "2055" Short Form Report

We offer a high quality low cost short form alternative..."Limited Residential Appraisal and Summary Report"  It has been widely accepted for use where the more lengthy FNMA 1004 Report is not necessary.  It can be used for tax grievance (small claims assessment review), uncontested matrimonial, estate or financial planning, gift tax, bail bonds or to establish fair market value for sellers or purchasers. It is available for use on one to four family dwellings, condominium individual units, homeowner association individual units, co-operative apartment individual units and vacant residential land (single lot).

The appraiser's description of the physical characteristics of the property will be obtained from reliable data sources and either an interior and exterior inspection or drive-by exterior inspection (when interior access is not possible or desired).

A Our "short form Residential Appraisal Report" typically consists of a letter of transmittal; brief neighborhood analysis; brief description of the site; brief description of the improvements; direct sales comparison approach; reconciliation; definition of market value; certification; contingent & limiting conditions; exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map and qualifications of the appraiser and reviewer.

Uniform Residential Appraisal Report

The Form 1004, "Uniform Residential Appraisal Report" is the most commonly used appraisal form.  It is designed for single-family and owner occupied two family (not for lending purposes) homes, including those with auxiliary apartments or "mother/daughter" units.  It is extensively used by lenders and other investors for purchases and refinancing purposes.  It is also used for formal certiorari tax appeals, condemnation, contested matrimonial or any situation involving a single family dwelling or owner occupied two family dwelling in which court testimony is contemplated.

The appraiser's description of the physical characteristics of the property and comparables will be obtained from reliable data sources.  There will be a thorough interior and exterior inspection. The inspections take about half an hour to one hour, depending on the size of the house.

A "Uniform Residential Appraisal Report" typically consists of a letter of transmittal; neighborhood analysis; description of the site; description of the improvements; cost approach; direct sales comparison approach utilizing a minimum of four comparable sales on the comparison grid (five comparable sales above $350,000); reconciliation; definition of market value; certification; contingent & limiting conditions; firrea addendum; interior and exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map; sketch of subject property showing room layout; flood map if in print and qualifications of the appraiser and reviewer.

Individual Condominium Unit Appraisal Report

The Form 1073, "Individual Condominium Unit Appraisal Report" is designed for condominium or homeowner association individual units. It is extensively used by lenders and other investors for purchases and refinancing purposes.  It is also used for formal certiorari tax appeals, contested matrimonial or any situation involving an individual condominium or homeowner association unit in which court testimony is contemplated.

The appraiser's description of the physical characteristics of the property and comparables will be obtained from reliable data sources.  There will be a thorough interior and exterior inspection. The inspections take about half an hour to one hour, depending on the size of the project and of the unit.

An "Individual Condominium Unit Appraisal Report" typically consists of a letter of transmittal; neighborhood analysis; description of the site; description of the improvements; cost approach; direct sales comparison approach utilizing a minimum of four comparable sales on the comparison grid (five comparable sales above $350,000); reconciliation; definition of market value; certification; contingent & limiting conditions; firrea addendum; interior and exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map; sketch of subject property showing room layout; flood map if in print and qualifications of the appraiser and reviewer.

Individual Co-operative Apartment Unit Appraisal Report

The Form 1055, "Individual Co-operative Apartment Unit Appraisal Report" is designed for co-operative apartment individual units.  It is extensively used by lenders and other investors for purchases and refinancing purposes.  It is also used for contested matrimonial or any situation involving an individual co-operative apartment unit in which court testimony is contemplated.

The appraiser's description of the physical characteristics of the property and comparables will be obtained from reliable data sources.  There will be a thorough interior and exterior inspection. The inspections take about half an hour to one hour, depending on the size of the project and of the unit.

An "Individual Co-operative Apartment Unit Appraisal Report" typically consists of a letter of transmittal; neighborhood analysis; description of the site; description of the improvements; cost approach; direct sales comparison approach utilizing a minimum of four comparable sales on the comparison grid (five comparable sales above $350,000); reconciliation; definition of market value; certification; contingent & limiting conditions; co-operative apartment addendum; firrea addendum, interior and exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map; sketch of subject property showing room layout; flood map if in print and qualifications of the appraiser and reviewer.

Small Residential Income Property Appraisal Report

The Form 1025, "Small Residential Income Property Appraisal Report" is designed for two to four family income properties. It is extensively used by lenders and other investors for purchases and refinancing purposes. It is also used for formal certiorari tax appeals, condemnation, contested matrimonial or any situation involving a two to four family income property in which court testimony is contemplated.

The appraiser's description of the physical characteristics of the property and comparables will be obtained from reliable data sources.  There will be a thorough interior and exterior inspection. The inspections take about half an hour to one hour, depending on the size of the dwelling.

A "Small Residential Income Property Appraisal Report" typically consists of a letter of transmittal; neighborhood analysis; description of the site; description of the improvements; rental income analysis; cost approach; income approach; direct sales comparison approach utilizing a minimum of four comparable sales on the comparison grid (five comparable sales above $350,000); reconciliation; operating income statement, definition of market value; certification; contingent & limiting conditions; firrea addendum; interior and exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map; sketch of subject property showing room layout; flood map if in print and qualifications of the appraiser and reviewer.

What are some Common Commercial Appraisal Reports?

Short Form Report

We offer a low cost short form "Limited Commercial/Industrial/land Appraisal and Summary Report". It has been widely accepted for use where a more lengthy narrative report is not necessary.  It can be used for uncontested matrimonial, estate or financial planning, gift tax, bail bonds, partnership/corporate buyout or to establish fair market value for sellers or purchasers. It is available for use on small non-complex commercial & industrial properties or vacant land (except subdivision).

The appraiser's description of the physical characteristics of the property will be obtained from reliable data sources and either an interior and exterior inspection or drive-by exterior inspection (when interior access is not possible or desired).  The inspections take about half an hour to one hour, depending on the size of the building.

Our "short form Commercial/Industrial Appraisal Report" typically consists of a letter of transmittal; brief neighborhood analysis; brief description of the site; brief description of the improvements; direct sales comparison approach; reconciliation; definition of market value; certification; contingent & limiting conditions; exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map and qualifications of the appraiser and reviewer.

Brief Narrative Appraisal Report

Our "Brief Narrative Appraisal Report" is designed for any type of commercial or Industrial property or vacant land (except sub-division) It is used for formal certiorari tax appeals, condemnation, contested matrimonial or any situation involving small non-complex commercial property, industrial property or vacant land in which court testimony is contemplated.

The appraiser's description of the physical characteristics of the property and comparables will be obtained from reliable data sources.  There will be a thorough interior and exterior inspection. The inspection will generally take from one hour to two hours, depending on the size and complexity of the building.

Our "Brief Narrative Appraisal Report" is a "summary" report which typically consists of a letter of transmittal; summary of important conclusions, regional analysis, neighborhood analysis; description of the site; description of the improvements; highest and best use analysis; zoning analysis; tax analysis; statement of ownership; property rights appraised; scope of the appraisal; cost approach; income approach; direct sales comparison approach utilizing a minimum of six comparable sales on the comparison grid; reconciliation; description of the appraisal process, definition of market value; certification; contingent & limiting conditions; firrea addendum; interior and exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map; sketch of subject property showing layout; flood map if in print and qualifications of the appraiser and reviewer.

Full Narrative Appraisal Report

Our "Full Narrative Appraisal Report" is designed for any type of commercial or Industrial property or vacant land including sub-division. It is extensively used by lenders and other investors for purchases and refinancing purposes. It is also used for formal certiorari tax appeals, condemnation, contested matrimonial or any situation involving complex commercial property, industrial property or vacant land in which court testimony is contemplated.

The appraiser's description of the physical characteristics of the property and comparables will be obtained from reliable data sources.  There will be a thorough interior and exterior inspection. The inspection will generally take from one hour to six hours, depending on the size and complexity of the building.

A "Full Narrative Appraisal Report" is a "self contained" in depth report which typically consists of a letter of transmittal; summary of important conclusions, regional analysis, neighborhood analysis; description of the site; description of the improvements; highest and best use analysis; zoning analysis; tax analysis; statement of ownership; property rights appraised; scope of the appraisal; cost approach; income approach; direct sales comparison approach utilizing a minimum of eight comparable sales on the comparison grid; reconciliation; description of the appraisal process, definition of market value; certification; contingent & limiting conditions; firrea addendum; interior and exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map; sketch of subject property showing layout; flood map if in print and qualifications of the appraiser and reviewer.