Appraising Properties - The Nuts and Bolts of Real Estate Evaluation
An appraisal is an opinion or estimate of a property's value. It is an evaluation determined by someone qualified to estimate the value of real property.
Who determines who's qualified? Two different trade organizations: The Appraisal Institute, (a merger between The American Institute of Real Estate Appraisers & The Society of Real Estate Appraisers) and The National Society of Real Estate Appraisers. Both organizations hold their members to rigorous standards. Certifications are based on continuing education requirements, ethical standards, and grievance and enforcement procedures.
Most lenders require a property appraisal for a new mortgage loan. This appraisal, which attempts to justify the contract price to the lender, usually takes place after the contract between buyer and seller has been finalized. The appraiser is usually given the contract price before he proceeds. Appraisals are also performed to determine a reasonable offering price in a sale, property value for estate tax purposes, value of land versus the structure, and for insurance and tax purposes.
An Appraisal Report describes the results of the procedure. Reports can be presented many ways, including oral, written, narrative, letter or form style. Most residential appraisals are presented on a standard Uniform Residential Appraisal Report. This form meets the requirements of most lenders as well as those in the secondary markets. Subjects covered include; Neighborhood, Site, Improvements, Interior Finish and Equipment, and a Valuation Section that includes the method(s) of appraisal used and a Market Data Analysis comparing similar properties in the neighborhood. A Photographic Addendum is usually attached, showing the property from various views, and Area & Tract Maps identifying the property's specific location.
An appraiser must try to determine the "fair market value" of the property. The estimation of this value is approached in 3 ways. The COST APPROACH determines the replacement cost of the land and the building at today's rates, less depreciation. The INCOME APPROACH measures the income potential of the property. The PRICE METHOD is the most valid approach in estimating property values. This method analyzes the selling prices of recently sold, comparable properties in the area. Sometimes a combination of methods is used to evaluate the property.
In the past, it was quite common for an appraisal to come in at the exact amount as the contract price of the sale. This benefited the lender, who decided which appraiser to use, and in turn the lender would reward the appraiser with more business.
An appraisal is an estimation. It does not determine the market rate, indicate a thorough inspection, guarantee the condition, or grant or imply any warranties regarding the condition of the property. Appraisals are not infallible and they can be very complex, depending on the nature of the subject property.
In 1985, the Mortgage Guaranty Insurance Corporation studied over 300 foreclosed properties around the country. These properties were selected for examination because the original appraisals and the ones conducted at the time of foreclosure were more than 20% apart. It was determined that in most cases, changes in the real estate market had affected the value differences, but in almost 40% of the cases, "the appraiser's inexperience or incompetence was usually responsible."
Order an appraisal when you need an accurate evaluation of a property. A realtor's opinion may not accurately reflect the true market price. Use a well-recommended appraiser, one who is a member in good standing in his trade organization. Use a specialist trained in residential evaluation when seeking a residential property, a specialist in commercial properties for commercial property purchases.
An appraisal can help you avoid overpaying for a property. If an appraisal comes in low, find out why. It may be that the appraiser missed something significant about the property. It may also be normal for the market price of a property to be 110% - 120% of the appraised value. This is true in many markets.
Depending on the complexity and scope, expect to pay between $150 - $300 for a good appraisal report. Experienced investors agree that it can be well worth the money.
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