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The Typical Appraisal Process
Real estate appraisals are needed in a variety of business transactions. Assignments can be tailored to the clients needs by writing the appropriate Scope of Assignment or Work, the description of appraisal assignment and work, and disclosing the appropriate extraordinary assumptions and hypothetical conditions. A discussion of the clients needs with the appraiser defines the assignment. Most common appraisal assignments are for mortgage or private lending purposes.
The appraisal process typically consists of, but is not limited to:
- Defining the scope of assignment
- Data Collection and Analysis
- Employing applicable approaches and techniques
- Reconciliation of value indications into final estimate
- The appraisal report
The appraiser should define the scope of the assignment to the needs of the client.
If the appraisal is needed for mortgage loan purposes, what type of form report will suffice, or is a self-contained narrative report required because the property is commercial? If the appraisal is for legal purposes, litigation or estate, what is the effective date of the assignment. To what degree is the data collection and analysis needed. USPAP defines the standards of the assignment, but State and Federal assignments require more stringent standards. We can meet all the requirements and complete the assignments, but some lenders do not use us because of our independence, and failure to "hit" the sale number to make the deal work. Our estimates of value are what we believe. Due to the implementation of the Home Valuation Code of Conduct (HVCC), the appraiser can no longer accept HUD assignments for mortgage assignments directly from Mortgage Brokers and/or Real Estate Agents. Those assignmens have to be assigned through the lender's Appraisal Management Company.
Assignments that are not subject to federal requirements but are needed to make educated assumptions and real market decisions in the business of real estate, are defined by the scope of assignment and produce very credible results. Please contact us for further details.
Data Collection and Anaysis
So what goes into a real estate appraisal? It all starts with the viewing of the subject property. An appraiser's duty is to view the property being appraised to ascertain the true status of that property. The appraiser must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The viewing of the subject parcel often verifies size of land and improvements, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the property.
Employing Applicable Approaches and Techniques
Once the property has been viewed, the appraiser uses all applicable approaches, techniques and collected data to determining the value of real property. Typically, a cost approach, a sales comparison approach and an income approach are employed.
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The Cost Approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
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Instead, most appraisers rely on the Sales Comparison Approach to value as this approach best reflects the actions of the buyer and seller in the market place. Appraisers get to know the areas in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways, and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach. Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or lots with a "view" (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.
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In the case of income producing properties - commercial rental properties for example - the appraiser may use the Income Approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Reconciliation
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who do not want to loan a buyer more money than the property is actually worth.
The Report
Last, but not least, is the type of report. The report can range from verbal testimony to a self-contained narrative. Most residential reports are form reports, which are priced considerably less than narrative reports. A self contained narrative report is the most detailed report to be obtained on the subject property.
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