What is an Appraisal?
An appraisal is a process leading to an opinion of value. This opinion or estimate is generally arrived at through consideration of three different approaches to value – the Sales Comparison Approach, the Cost Approach, and the Income Approach.
The Sales Comparison Approach is normally the most accurate and best indicator of value for a residential property. Using this method, the appraiser analyzes sales of comparable homes from the subject’s market and develops an opinion of the subject property’s current market value.
The Cost Approach – which is what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value.
The third approach is the Income Approach, which is most important in appraising income producing properties – it involves estimating what an investor would pay based on the income produced by the property.
What is the difference between a home inspection and an appraisal?
A home inspector evaluates the physical condition of a building: the structure, construction and mechanical systems, identifies items that should be repaired or replaced, and estimates the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure and finishes. An inspector does not estimate the market value of a home.
An appraisal report is a document that provides an estimate of a property’s market value. Lenders require appraisals on properties prior to loan approval to ensure that the mortgage loan amount is not more than the value of the property. In most cases, appraisals done are for the benefit of lenders, and home inspections are for buyers.
There are many reasons to get an appraisal
Every year, countless people in the United States buy, sell or refinance real estate. Most of these transactions involve mortgage lenders who require appraisals as verification of the value of the property in question. However, there are many other reasons people order appraisals.
If you need to consolidate bills, have a college tuition to pay, or just want to tap into the equity of your home, you’ll need a new loan. This usually requires a new appraisal of the property.
Appraiser Jargon
Have you heard an appraiser use an unfamiliar term, or found terminology in appraisal report you didn’t understand? Appraisers don’t intend to speak a foreign language, but every profession has its jargon. Here are some examples of common appraiser jargon and their meanings:
When comparable properties have been identified, the appraiser adjusts the value of the subject property according to differences in living area, acreage, frontage, amenities and the like. This is where the professional expertise of an appraiser is most valuable.
Personal property that may be on the subject property but which does not figure into the opinion of value in the appraisal report.
Properties like the subject property nearby which have sold recently, used as a basis to determine the fair market value of the subject property. The Uniform Standards of Professional Appraisal Practice (USPAP) establish clear guidelines for comparable selection.
An appraisal that is limited to examination of comparable sales and a determination that the property is actually there and has no obvious defects or damage visible from the outside. Fannie Mae’s form for this type of appraisal is its 2055, so you may hear a drive-by referred to as a “2055.”
The appraiser’s opinion of value as written in his or her appraisal report should reflect the fair market value of the property — what a willing seller would pay a willing buyer in an arm’s-length transaction.
“Gross Living Area,” the sum of all above grade floor space, including stairways and closet space. GLA is often determined using exterior wall measurements.
A defect on the property that is not readily apparent but which impact the fair market value. Structural damage or termite infestation might be examples.
A Multiple Listing Service is a proprietary listing of all properties on the market in a given area and their listing prices, as well as a record of all recent closed sales and their sales prices. Created by and used primary by real estate agents, many appraisers pay for access to these databases to aid in comparable selection and adjustment research.
The value of assets diminishes as their capabilities degrade or more desirable alternatives are developed. Functional obsolescence is the presence or absence of a feature which renders the property undesirable. Obsolescence can also occur because the surrounding area changes, making a feature of the property less desirable.
Short for the property being appraised — the “subject property.”
The time during which a property can provide benefits to its owner.
Short for Uniform Residential Appraisal Report, Fannie Mae form 1004, it is the form most lenders require if they need a full appraisal (that is, with walk-through inspection).
Short for Uniform Standards of Professional Appraisal Practice, USPAP promotes standards and professionalism in appraisal practice, and is often enacted into law in a state. It is promulgated by the Appraisal Foundation, a non-governmental entity chartered by Congress to, among other things, maintain appraisal standards.
An inspection that includes a visit to each part of the interior of the house used in estimating value.
A statement of proposed rental rates, determined by the owner or the property manager or both, based on a building’s estimated expenses, market supply and demand and the owner’s long-range goals for the property.
The lender should use this form to determine the amount of operating income that can be used in evaluating the applicant’s credit on applications for conventional mortgages that are secured by one-family investment properties and all two- to four-family properties (including those in which the applicant occupies one of the units as a principal residence).