What is an Appraisal?
What Does an Appraiser Do?
Why Would a Person Need a Home Appraisal?
What is the Difference Between an Appraisal and a Home Inspection?
What is the Difference Between an Appraisal and a Comparative Market Analysis (CMA)?
What Does the Appraisal Report Contain?
After Completing the Report, What Assurance is There that the Value Indicated is Valid?
How are Appraisers Certified?
Who do Appraisers Work For?
Where Does an Appraiser Get the Information Used to Estimate Value?
Why Do I Need a Professional Appraisal?
What Exactly is PMI and How Can I Get Rid of It?
How Do I Get Ready for the Appraiser?
What is ”Market Value?”
Who Actually Owns the Appraisal Report?
Which Home Renovations Increase Value the Most?
What is an Appraisal? Back to top
An appraisal is a thought process leading to an opinion of value. This opinion, or estimate, is arrived at through a process that typically uses the one or more of the three ”approaches to value”. There is the Sales Comparison Approach – the most commonly used method which involves making a comparison to other similar, nearby properties which have recently sold. The Sales Comparison Approach is normally the most accurate and best indicator of value for a residential property. 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 of most importance in appraising income producing properties – it involves estimating what an investor would pay based on the income produced by the property.
What Does an Appraiser Do? Back to top
An appraiser provides a professional, unbiased opinion of market value, to be used in making decisions with regards to the real estate. Appraisers analyze general market data, historical and current, to determine trends. Appraisers review comparable market data to determine trends for comparable homes as well as most probable current prices.
Why Would a Person Need a Home Appraisal? Back to top
There are many reasons to obtain an appraisal with the most common reason being real estate and mortgage transactions. Other reasons for ordering an appraisal include:
- To Obtain a Bank Loan
- To Dispute County Tax Values
- To Establish an Insurance Basis
- To Aid in Divorce Proceedings
- To Settle an Estate
- To Act as a Negotiation Tool When Buying Real Estate
- To Determine a Reasonable Asking Price When Selling Real Estate
- To Remove Private Mortgage Insurance, Known as PMI
What is the Difference Between an Appraisal and a Home Inspection? Back to top
An appraiser is not a home inspector nor does he/she do a complete home inspection. An inspection is a overview and evaluation of the structure and mechanical systems of a house, from the roof to the foundation. The standard home inspector’s report will include an evaluation of the condition of the home’s heating system, central air conditioning system, interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.
What is the Difference Between an Appraisal and a Comparative Market Analysis (CMA)? Back to top
Simply put, the difference is night and day. A CMA relies on vague market trends with no significant scientific data supporting it. The appraisal relies on specific, verifiable comparable sales. In addition, the appraisal looks at other factors like condition, location and construction costs. A CMA delivers a ”ball park figure” usually based on current prices per square foot. An appraisal delivers a well researched and thoroughly documented opinion of value.
But the biggest difference is the person creating the report. A CMA is created by a real estate agent who may or may not have a true grasp of the market or valuation concepts. The appraisal is created by a licensed, certified professional who has made a career out of valuing properties. Further, the appraiser is an independent voice, with no vested interest in the value of a home, unlike the real estate agent, whose income is tied to the value of the home.
What Does the Appraisal Report Contain? Back to top
Each report must provide a credible estimate of value as well as identify the intended use and intended user(s) of the report. Depending on the type or appraisal report ordered, you will also receive additional addendum such as market statistics, market trending graphs, locations maps, a building sketch detailing all living and non-living area and a comparable analysis section which displays adjustments made against comparable properties.
How Do I Know the Value Indicated is Valid? Back to top
Appraiser’s are licensed by the Texas Appraiser Licensing and Certification Board. Texas licensed or certified appraiser are trained to render an unbiased opinion based upon extensive education and experience requirements. To become licensed or certified, appraisers must fulfill rigorous education and experience requirements. In addition, appraisers must abide by a strict industry code of ethics and comply with national standards of practice for real estate appraisal. The rules for developing an appraisal and reporting its results are insured by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP). In other words, an appraiser would have much to lose if he or she were found to be producing unreliable appraisal reports. Furthermore, as mandated by USPAP, in communicating an appraisal report, each appraiser must ensure the following:
- That the information analysis utilized in the appraisal was appropriate
- That significant errors of omission or commission were not committed individually or collectively
- That appraisal services were not rendered in a careless or negligent manner
- That a credible, supportable appraisal report was communicated
How are Appraisers Certified? Back to top
Texas appraisers are required to complete a minimum of 150 hours of appraisal course work and obtain 2,000 hours of appraising experience under the tutelage of another appraiser. During this period the sponsoring appraiser is semi-responsible for the trainee’s appraisal work.
Who Do Appraisers Work For? Back to top
Traditionally, appraisers were only employed by brokers and lenders to estimate the value of real estate involved in a loan transaction. Nowadays consumers are more savvy and you will find appraisers working for pretty much everyone. The party that contracts the appraiser to perform an assignment becomes the “client” and all work completed for that client is only delivered to them unless instructed otherwise.
Where Does an Appraiser Get the Information Used to Estimate Value?Back to top
Gathering data is one of the primary roles of an appraiser. Data can be divided into Specific and General. Specific data is gathered from the home itself. Location, condition, amenities, size and other specific data are gathered by the appraiser during an inspection.
In Houston general data is gathered from a number of sources. HAR provide data on current listings and recently sold homes that might be used as comparables. Stewart Title provides tax information for more extensive details about a property. Flood zone data is gathered from FEMA using InterFlood. And most importantly, the appraiser gathers general data from his or her past experience in creating appraisals for other properties in the same market.
Why Do I Need a Professional Appraisal? Back to top
Anytime the value of your home or other real property is being used to make a significant financial decision, an appraisal helps. If you’re selling your home, an appraisal helps you set the most appropriate value. If you’re buying, it makes sure you don’t overpay. If you’re engaged in an estate settlement or divorce, it ensures that property is divided fairly. A home is often the single, largest financial asset anybody owns. Knowing its true value means you can the right financial decisions.
What Exactly is PMI and How Can I Get Rid of It? Back to top
PMI stands for Private Mortgage Insurance. It insures a lender against loss on homes purchased with a down-payment of less than 20%. Once equity in the home reaches 20% you can eliminate the PMI and start saving immediately. Be sure to contact your lender first, as many have raised the equity requirements to 75%!
How Do I Get Ready for the Appraiser? Back to top
The first step in the appraisal process is the site visit. During this process, the appraiser will come to your home and measure it to verify accurate square footage, determine the layout of the rooms inside, make notes on the home’s overall condition and quality of construction, and take several photos of your house for inclusion in the report. If there is any basic maintenance that needs to be taken care of, ie. painting, replace trim, etc., it is best to take care of that before the appraiser arrives. And the most helpful thing you can do is to make sure the appraiser has easy access to the all rooms of the house and the exterior of the house. Trim any bushes and move any items that would make it difficult to measure the exterior of the structure. If the appraisal is going to be FHA, make sure that the appraiser can easily access items like furnaces, attics and water heaters.
What is ”Market Value?” Back to top
Market value, or fair market value, is the most probable price that a property should sell for in a competitive and open market under all conditions requisite to a fair sale. These conditions are that the buyer and seller, are each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Furthermore, the transaction must be considered one of “arms-length”, meaning both buyer and seller are typically motivated; are well informed or well advised; a reasonable time is allowed for exposure to the open market; payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and that 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.
Who Actually Owns the Appraisal Report? Back to top
The party that directly engages the appraiser becomes the client and actually “owns” the appraisal report. For instance, if a home owner engages an appraiser directly they own the appraisal. In these cases, the appraiser may stipulate how the appraisal can be used; for PMI removal, or estate planning or tax challenges, for example. If not stipulated otherwise, the home owner can use the appraisal for any purpose. In most real estate transactions, the appraisal is ordered by the lender. While the home buyer pays for the report as part of the closing costs, the lender retains the right to use the report or any information contained within. The home buyer is entitled to a copy of the report – it’s usually included with all of the other closing documents – but is not entitled to use the report for any other purpose without permission from the lender.
Which Home Renovations Increase Value the Most? Back to top
The answer to this is different depending upon the location and sub-market of the home. Different markets value amenities differently. Adding a central air conditioner in Houston, Texas may add significant value, while putting one in a home located in Buffalo, New York might not have much impact. As an example of a sub-market; installing granite counter tops, hardwood flooring and upgraded fixtures in a home residing in a neighborhood of low-end tract homes would probably not yield an increase in value at all as these upgrades would be an “over-improvement” for your market.
As a rule, the most value returned from home renovations come in the “wet areas” of a house, the kitchen and baths. According to one national survey, kitchen remodels returned an average of 88% of the investment. In other words, a $10,000 kitchen remodeling project would add approximately $8,800 to the value of the home. Bathrooms were second, returning 85%. Minor cosmetic upgrades can also boost value if they are appropriate for your market; items such as crown molding, armchair railing, upgraded lighting and plumbing fixtures and sometimes flooring are typical “cosmetic” upgrades.