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Wessel Associates, Ltd. Real Estate Appraisal, Brokerage, & Consultation |
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All About Real Estate Appraisals - Frequently Asked Questions -
Because much private, corporate, and public wealth lies in real estate,
the estimation of its value is essential to the economic well-being
of society. It is the job of a professional appraiser to estimate 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.
Many states require all real estate appraisers 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. To see the specific requirements for any
state click
here.
The physical inspection of the real property being appraised can take from as little as fifteen minutes to several hours, depending upon the size of the property and its complexity. After the initial inspection
of the property the appraiser spends time driving through the neighborhood
or area. The purpose of this tour is to search for, and inspect, comparable
sales (other properties that are similar to the property being appraised)
that have sold within the last year or so. When the field work is finished,
the appraiser completes the report at his office. The report can consist
of a short form report (typically under ten pages) to a long narrative
report which can sometimes exceed a hundred pages. A short form report
usually takes between three to six hours to complete. A "narrative"
report (typically a complete appraisal in a self-contained format) can
take weeks or sometimes even months, depending upon the complexity of
the assignment.
Appraisal VS. Engineer or Whole House Inspection?
The appraiser is not a whole-house inspector, engineer, architect,
electrician, plumber, HVAC technician or contractor. The appraiser briefly
walks through the house to get an idea of the general condition and
room count. An appraisal is no guarantee of condition. The appraiser
will ask about any visible problems and those which may not be visible,
and will do his/her best to gauge any impact on value attributable to
those problems. You are encouraged to seek the advice of experts if
you have any questions about the structural or mechanical aspects
Short form "2055" Vs. "URAR Fannie
Mae" Form Appraisal Report
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 estimate the market value. Both rely heavily
on a direct sales comparison or market approach with a comparison grid
(see below) to estimate 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
& CMSA
information for tracking lending patterns.
Some lender reports require the appraiser 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 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 especially well-suited for helping a seller
to price a home for sale, helping a buyer to decide how much to offer
for a home, for estate tax, uncontested divorce and many other potential
uses other than for obtaining a mortgage or in litigation where the report
may be used in conjunction with expert testimony.
In our complex society, you may need and use the services of a professional
real estate appraiser for a variety of reasons. Depending upon an appraiser's
qualifications, he or she can provide some or all of these services:
Appraisals - Residential or Commercial; Counseling and Consulting; Evaluations;
Expert Witness Testimony; Litigation Preparation; Feasibility Studies;
Market Analysis; Market Rent & Trend Studies; Tax Assessment Review
and Advice or Zoning Testimony.
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.
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 and cost as well
as any other information you feel may be important.
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 is
estimated via the most applicable approach, in the opinion of the appraiser.
In most residential appraisals, particularly those of single or two
family dwellings, the direct sales comparison or market approach best
reflects the actions of buyers and sellers in the market and is the
most convincing and defensible approach to value.
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, e.g., fireplace, whirlpool tub, 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.
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 arm's-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.
An arm's-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.
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.
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, without undue delay, a property of equal desirability and
utility.
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
the possession, operation and/or capital gain at resale.
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.
Uniform Standards of Profesional Appraisal Practice
Appraisal Standards Board (ASB) |
