Apr

What You Need to Know About the Real Estate Appraisal Process

What is a Real Estate Appraisal?

Appraisal is a document that gives an estimate of a property’s fair market value, based on a detailed physical description of a property, its surroundings and the methods used to estimate the property value. An appraisal ascertains the market value of a property. The appraisal is performed by an “appraiser” must be state certified individual trained to use existing data to derive a home valuation. In an appraisal, consideration is given to the property, its location, amenities, and the current market values of similar properties.

There is no standard accepted definition of the word appraisal or real estate appraisal. However, most of the definitions incorporate the following seven principles:

An appraisal is an opinion of value.
The opinion must be appropriately supported with general and specific data.
It must be as of a specific date
The value estimated must be defined.
The property being appraised must be adequately and accurately described.
The person making the appraisal must be qualified by reason of adequate, education and experience.
The person making the appraisal is unbiased and has no undisclosed interest in the property.

Why get a Home Appraisal?

An appraisal is a necessary step in the home purchase or home refinance process. Below are a few more reasons why an appraisal might be necessary:

To determine a value when purchasing a home (Transfer of ownership)
To contest high property taxes or basis for taxation
To finalize and settle a divorce
To establish rental schedules and lease provisions
Feasibility analysis
To settle an estate
To establish the replacement cost (insurance purposes)
To protect your rights in an eminent domain case (Just compensation)
To refinance (Financing and Credit)

What are Home Appraisal Methods?

Appraisers use three common approaches when establishing the value of a given property:

1. Sales Comparison Approach: In this approach the appraiser identifies 3-4 comparable properties in the neighborhood which have recently been sold. The sales comparison approach is based on the assumption that an informed buyer would not pay more for a property than the cost to acquire a similar property. Ideally, the properties are close in vicinity (within a 1/2 mile radius of the subject property) and have sold within the last 180 days. These home will be of a similar nature in size, rooms, and layout. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and the condition of the property. This is the most common approach used in appraising residential or home properties.

2. Cost Approach: In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, plus the value of on-site improvements (driveway), less accrued depreciation the building suffers in comparison with a new building. The cost approach is based on the assumption that a home buyer would not pay more for a property than the cost to acquire a similar existing property. This approach is most relevant with new homes, and very unique homes. The cost approach breaks out the value of the land. If the ratio of land value to total value exceed 30%, on a USDA Loan, an explanation will be needed from the appraiser that this is common for the area, and that the lot cannot be subdivided, otherwise the property will be ineligible for USDA financing.

3. Income Approach: In this approach the potential net income of the property is capitalized to arrive at a property value. This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream into a present value is known as capitalization. The income approach is based on the assumption that a buyer would pay not more for a home than the cost to obtain a return of income of the same amount. This approach is typically only used with rental properties.

After thorough exercise of the three approaches, a final estimate or opinion of value is arrived upon based on the underlying data. When evaluating single-family, owner-occupied properties, the sales comparison home appraisal approach is most heavily used by an appraiser.

Who owns the Home Appraisal?

Even though the borrower may repay the lender/broker for the home appraisal, the mortgage company is the owner. This is counter-intuitive and can be frustrating for borrowers that are dealing with a mortgage company they have decided not to work with. This is because the mortgage company orders the home appraisal to validate the collateral value of the home, and the appraiser then names that mortgage company as the client on the home appraisal. Most loan programs require the lender to provide the borrower a copy of the appraisal report unless the borrower elects otherwise. Many loan programs allow the portability of appraisal that conform to the loan program requirements; but they do not mandate acceptance by the new lender. Since the final originating lender is responsible for the collateral valuation of a mortgaged home, many lenders will not accept appraisal ordered by another lender.

Can I use Another Mortgage Company Even After the Home Appraisal has Been Completed?

You can definitely use another mortgage company; however, the appraisal is the property of the original mortgage company. The appraisal would need to be released from the prior company and re-assigned to the new company. The Uniform Standards of Professional Appraisal Practice (USPAP) require the appraiser to inform the homeowner that once the name of the client is stated on the report, the appraiser cannot change the name of the client on the report. The appraiser is required to request a new assignment and establish a new appraiser-client relationship with the new company. A USDA Home Loan does not fall under the guidance of Home Valuation Code of Conduct (HVCC). The lenders of loans that fall under the regulation of HVCC, Fannie Mae and Freddie Mac, typically have their own vendor management company, and require the use of their vendor management company, and will not accept a loan that was previously completed. FHA loans require appraisal independence; however, they specifically require that the appraisal be allowed to be re-assigned. The borrower does have a right to receive a copy of the real estate appraisal. In some cases, changing your mortgage company does not mean you will have to pay for another appraisal.

Why did my house appraise at a different value?

Value variances can occur and there are many reasons that this can happen. Determining market value is not an exact science and relies on many factors; the amount of data available to the appraiser, the reliability of the data received, and how the appraiser interprets the data. If you had 5 appraisals done on the property you may get 5 different values; however, the values should all be within a reasonably close range.