Appraisals

What Is An Appraisal?

A property appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount does not exceed the value of the property. The appraisal is performed by an Appraiser who is typically a state-licensed professional trained to provide an expert analysis of a property’s value, location, amenities, and physical condition.

When Is It Beneficial to Get an Appraisal?

Obtaining a loan is the most common reason for ordering an appraisal, however there are other reasons to get one:

  • Contesting high property taxes
  • Establishing the replacement cost for insurance purposes
  • Divorce settlement
  • Estate settlement
  • Negotiating tool in real estate transactions
  • Determining a reasonable price when selling real estate
  • Protecting your rights in an eminent domain case
  • A government agency requirement
  • A lawsuit
What Are Appraisal Methods?

There are three common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all three, a final value estimate is determined.

  • Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
  • Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.
  • Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.
Who owns the Appraisal?

The mortgage company owns the appraisal even though the consumer paid for it. This is because the mortgage company orders the appraisal on the consumer’s behalf, and the Appraiser lists that mortgage company on the report. The consumer does have the right to receive a copy; however it’s the mortgage company’s discretion to give the consumer the original appraisal report.

Can Another Mortgage Company be Used After the Completed Appraisal?

Yes. In most cases you will not have to pay for another appraisal if you change your mortgage company, and depending on the loan program types, the first lender can transfer it to the new lender. Some appraisal firms may charge a small fee because additional clerical work is required to reflect the new mortgage company; this is called an “Appraisal Retype Fee”. The original mortgage company has the right to refuse to transfer the appraisal to another lender. In this case, a new appraisal is needed.

Who Determines the Market Value of a Property?

The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don’t order an appraisal because they want to obtain the highest price for their home and therefore don’t want to be bound by the Appraiser’s assessment.

If a property is listed for sale with a Realtor®, the Realtor will represent the seller throughout the sale process and assists in setting the asking or listing price.  To determine the listing price the Realtor will perform a Comparative Market Analysis (CMA), by researching recent selling prices of homes in the neighborhood that are similar to the subject property.  Looking at these recent relevant sales helps the Realtor determine the best listing price for the subject home. While the Realtor will suggest a listing price based on the CMA, the Seller will provide input and together they will arrive at a price. In most states, Realtors are allowed to perform a CMA without an Appraiser’s License or certification. When the home sells, the Realtor receives a percentage of the property’s selling price as compensation or commission for their assistance with the sale. 

How can I assist my Appraiser?

It’s to your advantage to help the Appraiser perform the assessment by providing additional information:

  • The purpose for the appraisal.
  • Is the property listed for sale, and if so, for what price and with whom?
  • Is there a mortgage? If so, provide the name of the servicing company, start date, loan amount, the type of mortgage (FHA, VA, etc.), interest rate, or other type of financing.
  • Are any personal properties or appliances included in the property?
  • With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.
  • Provide a copy of the deed, survey, purchase agreement, or additional property papers.
  • Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on utilities, such as sewer, water, etc.