Appraisals

An appraisal is an estimate of a property’s fair market value. Lenders generally require this document before approving a loan to ensure the mortgage amount doesn’t exceed the property’s value. Conducted by a state-licensed appraiser, the appraisal includes an expert opinion on the property’s value, location, amenities, and physical condition.

While obtaining a loan is the most common reason for ordering an appraisal, there are several other situations where you might need one:

• Contesting High Property Taxes: Use an appraisal to challenge high property tax assessments.
• Insurance Purposes: Establish the replacement cost for insurance coverage.
• Divorce Settlement: Determine the value of property for equitable division.
• Estate Settlement: Assess property value for inheritance purposes.
• Real Estate Transactions: Use as a negotiating tool when buying or selling property.
• Selling Real Estate: Determine a reasonable asking price.
• Eminent Domain Cases: Protect your rights when the government seeks to acquire your property.
• Government Agency Requirement: Comply with specific agency requirements.
• Lawsuits: Provide property value evidence in legal disputes.

Appraisals serve various purposes beyond securing a loan, making them a valuable tool in many real estate and legal matters.

Appraisers use three common approaches, or appraisal methods, to determine property value. After thoroughly applying all three, a final value estimate is established. For single-family, owner-occupied properties, the Sales Comparison Approach is often the most heavily weighted.

Cost Approach

The Cost Approach involves a formula to calculate the property value:

• Land Value: The value of the land as if it were vacant.
• Reconstruction Cost: The cost to rebuild the appraised building as new on the date of valuation.
• Depreciation: Subtract any accrued depreciation the building has suffered compared to a new building.

Sales Comparison Approach

The Sales Comparison Approach compares the subject property with 3 to 4 comparable properties (comps) that have recently sold in the neighborhood. Ideally, these comps were sold within the past 6 months and are located within ½ mile of the subject property. The comparison includes:

• Square footage
• Number of bedrooms and bathrooms
• Property age
• Lot size
• View
• Property condition

Income Approach

The Income Approach capitalizes the potential net income of the property to arrive at its value. Capitalization converts a future income stream into a present value. This approach is most suitable for income-generating properties and is used alongside other valuation methods.

These three methods provide a comprehensive view of a property’s value, ensuring a reliable and accurate appraisal.

The mortgage company owns the appraisal, even though the borrower pays for it. This is because the mortgage company orders the appraisal on the borrower’s behalf, and the appraiser lists that mortgage company on the report. While the borrower has the right to receive a copy, it’s up to the mortgage company to decide whether to provide the original appraisal report.

Yes, in most cases, you won’t need to pay for another appraisal if you change mortgage companies. Depending on the loan program type, the first lender can transfer the appraisal to the new lender. However, some appraisal firms may charge a small fee for the additional clerical work required to reflect the new mortgage company; this fee is called an “Appraisal Retype Fee.”

It’s important to note that the original mortgage company has the right to refuse to transfer the appraisal. If this happens, a new appraisal will be needed.

The property seller, not the appraiser, sets the price. This is especially the case for residential properties. Sellers usually don’t order an appraisal. They aim to get the highest possible price for their home, and don’t want to be limited by the appraiser’s valuation.

Role of the Real Estate Agent

Real estate agents, who often represent sellers, help set the sale price. They receive a percentage of the sale price as compensation. Agents perform a Comparative Market Analysis (CMA) to determine a suitable listing price. This analysis examines recent property sales in the neighborhood and does not require an appraiser’s license or certification in most states.

Comparative Market Analysis (CMA)

The CMA is crucial for agents to prepare a listing. It helps them suggest a competitive price to the seller. However, the seller may choose to list the property at a higher price based on their own expectations.

Yes, you can assist your appraiser by providing additional information to help with the assessment. Here are some ways you can contribute:

Provide Relevant Details

1. Purpose of the Appraisal: Explain why the appraisal is needed.
2. Listing Information: If the property is for sale, share the listing price and the agent’s details.
3. Mortgage Details: Inform the appraiser about any existing mortgages, including the lender, date placed, amount, type (FHA, VA, etc.), and interest rate.
4. Included Items: List any personal property or appliances included in the sale.
5. Income-Producing Properties: Provide a breakdown of income and expenses for the last one or two years. A copy of the lease may also be required.

Supply Essential Documents

1. Property Papers: Provide copies of the deed, survey, purchase agreement, or any other relevant property documents.
2. Tax Information: Share a copy of the current real estate tax bill, any special assessment statements, and balances owed on utilities like sewer and water.

By supplying this information, you can help ensure a thorough and accurate appraisal of your property.