An appraisal report is a analytical thought process that concludes with a opinion of value.
The appraiser will typically use three approaches to arrive at a final value conclusion.
One of the processes is the "Cost Approach" - which is how much it would cost to replace the improvements, minus physical deterioration and other factors, then adding the land value. The most common approach to value is the "Sales Comparison Approach". This approach involves a comparison of reasonably similar properties in the market area that have recently sold. Generally speaking, the Sales Comparison Approach is typically the primary indicator of value in the appraisal.
The Income Approach is mainly used for determining the value of income-producing properties based on what an investor would pay considering the amount of rental income a property would bring in.
An appraiser produces a professional, unbiased opinion of market value, often used in real estate transactions, and sometimes for other purposes.
Appraisers will produce a report that presents their analysis of the property.
There are a lot of reasons to get an appraisal with the most common reason being real estate and mortgage transactions.
Other reasons for getting an appraisal include:
To receive a loan.
If you would like to lower your property tax obligations.
To establish the replacement cost of insurance.
To challenge inflated property taxes.
If you need to settle an estate.
To provide you a leg-up when purchasing real estate.
To determine a reasonable property value when selling real estate.
To protect your rights in a condemnation case.
Because an official agency such as the IRS requires it.
If you are ever involved in a civil case.
Home inspectors do not provide an supported opinion of value.
A third-party home inspector will judge the structure of the residence, from the roof to the foundation.
Generally, a home inspection report will explain the amenities, deficiencies, and the necessities of the residence: air conditioning (weather permitting), electrical systems, the condition of the heating system, the plumbing; then the structural integrity of the home such as the attic, visible insulation, walls, floors, ceilings, windows, then the foundation, basement and visible structures.
Frankly, they have very little in common. The CMA in most cases depends on ill-defined or vague trends.
The appraisal report depends on a detailed comparison to reasonably alternative properties as compared to the subject, which are commonly known as comparable sales. Current market conditions impacting the value and marketability of the subject are also discussed in the appraisal. Market area and construction prices are also precedent in an appraisal.
The CMA will typically provide a non-specific figure.
Being a documented and carefully investigated opinion of value, appraisals are defensible and stand up in most legal situations.
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, and may not be impartial. The appraisal is created by a Licensed- Certified professional who has made a career out of valuing properties. Furthermore, 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, and the final outcome of a potential transaction.
Each report must reflect a credible estimate of value and must identify the following:
The client and other intended users.
The intended use of the report.
The purpose of the assignment.
The type of value reported and the definition of the value reported.
The effective date of the appraiser's opinions and conclusions.
Relevant property characteristics, including location attributes, physical attributes, legal attributes, economic attributes, the real property interest valued, and Non real estate items included in the appraisal, such as personal property, including trade fixtures and intangible items.
All known: easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, and other items of a similar nature.
Division of interest, such as fractional interest, physical segment and partial holding.
The scope of work used to complete the assignment.
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.
Most states require that real estate appraisers are state licensed or certified. The state licensed or certified appraiser is 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).
Regulations regarding licensing and certification of Real Estate Appraisers vary from state to state. However, licensing and certification is most often associated with many hours of coursework, tests and practical experience. Once an appraiser is licensed, he or she is required to take continuing education courses in order to keep the license current.
The appraiser works on behalf of their client. Typically, appraisers are employed by lenders (client) to estimate the value of real estate involved in a loan transaction. Appraisers also provide value opinions in litigation cases, tax matters, estate settlement, and investment decisions.
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 a physical on site inspection.
General data is gathered from a number of sources. Local Multiple Listing Services (MLS) and other subscribed data sources provide detailed information on recently sold residences that might be used as comparable sales. Tax records and other public documents verify actual sales prices in a given market area. Flood zone data is gathered from FEMA data outlets. And most importantly, the appraiser gathers general data from their past experience in creating appraisals for other properties in the same market area.
Anytime the value of your home or other real property is being used to make a significant financial decision, an appraisal is highly recommended. If you're selling your home, an appraisal helps you set the most appropriate offering price. If you're buying, it helps with making a informed decision, and may prevent you from overpaying. If you're engaged in an estate settlement or divorce, it helps ensure that property is divided fairly. A residence is often the single, largest financial asset anybody owns. Knowing its true value contributes to making wise financial decisions.
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.
The first step in most appraisals is the on site inspection. During this process, the appraiser will come to your home and measure it, determine the layout of the rooms inside, confirm all aspects of the home's general condition, and take multiple photos of your house for inclusion in the report. The best thing you can do to help is make sure the appraiser has easy access to throughout the interior and exterior of the residence. Relocate any items that would make it difficult to measure the structure. On the inside, make sure that the appraiser can easily access items like furnaces and water heaters, electric panels, etc.
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 property (legal document).
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 or current floor plan if available.
Market value as defined by FIRREA; The most probable price which a property should bring 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.
In most real estate transactions, the appraisal is ordered by the lender and therefore is the client. 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.
The exception to this rule is when a property owner engages an appraiser directly. In these cases, the appraiser may stipulate how the appraisal can be used; for gift tax, estate planning, or tax challenges, for example.
The answer to this is different depending upon the location of the home, and prehaps market conditions at time of sale. Different markets value amenities differently. Adding a central air conditioner in Miami, Florida may add significant value, while putting one in a home located in Buffalo, New York might not have the same value impact.
As a rule, the most value returned from renovating a residence comes from a kitchen remodel. According to one national survey, kitchen remodels returned an average of 88% of the investment. In other words, a $100,000 kitchen remodeling project would potentially contribute approximately $88,000 to the value of the home. Bathrooms were second, returning approximately 85% of cost to the overall value. However, it is important to note that these estimates can be greatly influenced by changing market conditions. In a soft market these improvements may contribute less in overall value, but may help produce a sale within a reasonable time period thus beating out the competition of properties for sale during that same time period. It also worth noting that the contribution to value of extensive renovations may diminish substantially if the market area does not support the extensive cost of those renovations. This is considered an over improvement for the market area.
Tri Borough Appraisals, Ltd. is happy to elaborate on any inquiries you might have about appraisals.
Contact Tri Borough Appraisals, Ltd. today to talk about how we can help solve your valuation problems.
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