What is an Appraisal
?
Appraisal is a
document that gives
an estimate of a
property's fair
market value. An
appraisal is
generally required
by a lender before
loan approval to
ensure that the
mortgage loan amount
is not more than the
value of the
property. The
appraisal is
performed by an
"appraiser" who is
typically a
state-licensed
individual trained
to render expert
opinions concerning
property values. In
an appraisal,
consideration is
given to the
property, its
location, amenities
as well as its
physical conditions.
Why get an
Appraisal ?
The most common
reason for ordering
an appraisal is to
obtain a loan on a
property. However,
there are several
other reasons why an
appraisal might be
needed. Below are
just a few:
-
to establish the replacement cost (insurance
purposes).
-
to contest high property taxes.
-
to settle a divorce.
-
to settle an estate.
-
to use as a negotiation tool (in real estate
transactions).
-
to determine a reasonable price when selling real
estate.
-
to protect your rights in an eminent domain case.
-
because a government agency requires it.
-
lawsuit.
What are Appraisal
Methods ?
Appraisers use three
common approaches
when establishing
the value of a given
property:
1.
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, less
accrued depreciation
the building suffers
in comparison with a
new building.
2.
Sales Comparison Approach:
In this approach the
appraiser identifies
3-4 comparable
properties in the
neighborhood which
have recently been
sold. Ideally, the
properties are close
in vicinity (within
a 1/2 mile radius of
the subject
property) and have
sold within the last
six months. 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 property
condition.
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.
After thorough
exercise of the
three approaches, a
final estimate or
opinion of value is
correlated. When
evaluating
single-family,
owner-occupied
properties, the
sales comparison
approach is most
heavily weighted by
an appraiser.
Who
owns the Appraisal ?
Even though the
borrower pays for
the appraisal, the
mortgage company
owns it. This is
because the mortgage
company orders the
appraisal on the
borrower's behalf,
and the appraiser
lists that mortgage
company on the
appraisal report.
However, the
borrower has the
right to receive a
copy. It is at the
mortgage company's
discretion whether
or not to give the
borrower the
original appraisal.
Can I use another
mortgage company
even after the
appraisal has been
completed ?
Yes. In most cases,
changing your
mortgage company
does not mean you
will have to pay for
another appraisal.
The first lender can
transfer the
appraisal to your
new lender. Some
appraisal firms may
charge a small fee,
however, because
there is clerical
work involved in
editing the
appraisal to reflect
the new mortgage
company. This fee is
called an "Appraisal
Retype Fee." The
original mortgage
company has the
right to refuse to
transfer the
appraisal to another
lender. In this
event, you will need
to get a new
appraisal.
Who determines the
market value of a
property ?
The seller of the
property is the
person who sets the
price of the
property (specially
residential
property), and not
an appraiser. This
is because sellers
normally do not
order an appraisal
when selling their
homes. Sellers wish
to obtain the
highest selling
price possible for
their homes and
hence do not want to
be bound by the
appraiser's
assessment of their
home. The real
estate agent, who
receives a
percentage of the
price as
compensation and
often represents the
seller in the
transaction,
normally assists the
seller in setting
the sale price.
The real estate
agent performs a
comparative market
analysis (CMA). The
appraisal laws in
most states allow
real estate agents
to perform CMAs
without an
appraiser's license
or certification. A
CMA is a necessary
part of the agent's
preparation for a
listing and consists
of examining sales
of properties in the
area to arrive at a
listing price. The
reliability of the
CMA depends upon the
agent's experience
and the
characteristics of
the property and the
surrounding area.
Typically, the agent
will suggest a
selling price to the
seller based upon
the analysis.
However, the seller
may not accept that
price and choose to
list the property
for a higher price.
Assisting
your Appraiser
In order for the
appraiser to perform
his/her job properly
there might be
requirements for
additional
information. Some
information that may
be requested is as
follows:
-
What is the purpose of the appraisal?
-
Is property listed for sale and if so, for how
much and with
whom?
-
Is there a mortgage? If so, with whom, when
placed, for how
much, type of
mortgage [FHA,
VA etc.],
interest rate,
and any other
types of
financing.
-
What personal properties, such as appliances, are
included in the
property?
-
If it is an income-producing property, a breakdown
of income and
expenses for the
last year or two
and a copy of
lease might be
required.
-
Provide a copy of deed, survey, purchase agreement
or other
pertinent papers
pertaining to
the property.
-
Provide a copy of current real estate tax bill,
statement of
special
assessments,
balance owing
and on what
[sewer, water,
etc.].
