Frequently Asked Questions

An appraisal is a process leading to an opinion of value. This opinion or estimate is arrived at through a formal process that typically uses the three approaches to value. The first is the Cost Approach – which is what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value. The second is the Sales Comparison Approach – this involves making a comparison of the subject property to other similar, nearby properties that have recently sold. The Sales Comparison Approach is normally the most accurate and best indicator of value for a residential property. The third approach is the Income Approach, which is often of most importance in appraising income producing properties. It involves estimating what an investor would pay based on the income produced by the property. The value indications from the three approaches to value are reconciled and a final opinion of value is concluded based on the strengths and weaknesses of each of the approaches.

An appraiser provides a professional, unbiased opinion of value, to be used in making real estate decisions. Appraisers present their formal analysis in appraisal reports.

At minimum, all states require appraisers to be state licensed or certified in order to provide appraisals to federally regulated lenders. Appraisers have fulfilled educational and experience requirements and must adhere to strict standards and a code of professional ethics. Qualified appraisers bring knowledge, experience, impartiality and trust to the transaction. In so doing, they help their clients make sound decisions with regard to real property. Appraisers who hold the MAI designation have completed rigorous training, education and experience requirements well beyond the requirements of state certification.

There are many reasons to obtain an appraisal with the most common reason being mortgage transactions. Other reasons for ordering an appraisal include:

• To obtain a loan.
• To lower your tax burden.
• To establish the replacement cost for insurance.
• To contest high property taxes.
• To settle an estate.
• To provide a negotiating tool when purchasing real estate.
• To determine a reasonable price when selling real estate.
• To protect your rights in a condemnation case.
• Because a government agency such as the IRS requires it.
• If you are involved in a lawsuit.

Each report must reflect a credible opinion 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.

Our publication “A Guide to Using a Real Property Appraisal Report” is available upon request. Click here to request a copy of this publication.

Typically, appraisers are employed by lenders to estimate the value of real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters, investment decisions and in other situations were an opinion of value is required.

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 an inspection.

General data is gathered from a number of sources. Local Multiple Listing Services (MLS) provide data on recently sold homes that might be used as comparables. Tax records and other public documents verify actual sales prices in a market. Flood zone data is gathered from FEMA data outlets. And most importantly, the appraiser gathers general data from his or her past experience in creating appraisals for other properties in the same market.

Anytime the value of your real property is being used to make a significant financial decision, an appraisal helps. If you’re selling real estate, an appraisal helps you set the most appropriate price. If you’re buying, it makes sure you don’t overpay. If you’re engaged in an estate settlement or divorce, it ensures that property is divided fairly. Real estate is often the single, largest financial asset any person owns. Knowing its value means you can make an informed decision.

There are several definitions of market value. The most commonly used definition is, the most probable price that a property should bring (will sell for) 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. While the borrower pays for the report as part of the closing costs, the lender retains the right to use the report or any information contained within it. The borrower is entitled to a copy of the report and it’s usually included with all of the other closing documents but the buyer is not entitled to use the report for any other purpose without permission from the lender and the appraiser.

The exception to this rule is when a homeowner engages an appraiser directly. In these cases, the appraiser may stipulate how the appraisal can be used; for PMI removal, or estate planning or tax challenges, for example. It should be noted that the lender must order the appraisal in any federally insured transaction. The ordering of an appraisal report by a borrower could result in additional fees being required when the lender orders another appraisal report.