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WHO, WHAT, WHY, and HOW to Understand a Real Estate Appraisal

By Charles Hopkins Published 07/31/2007 | Real Estate

WHAT is an appraisal?

An appraisal is a process to determine value regulated by the Government.
In real estate a person needs to get a value (an appraisal) for their home because:

1. They want to borrow money.
2. They want to buy or sell a house or business.
3. They need to determine a value for a family situation.

The person who goes thru the process to determine the value is an appraiser; state licensed and regulated, trained, and experience in real estate where the home is located.

There is a big difference in appraisers, based on their training, experience, and attention to detail. The opinion of value in an appraisal report is an estimated fair market value; the price a normal buyer would pay a normal seller for the home if it were for sale. The appraiser uses local market information to arrive at this opinion of value.

Why does someone need an appraisal?

If a loan is involved, a Lender (the guy with the money) wants to be sure they get their money back. The lender hires an appraiser to determine the home's value in case the Lender has to sell the home to get their money back.

The client of the appraiser is whoever orders the appraisal, usually a bank or mortgage company. Only the Client has the right to the information they request, no matter who pays for it. This is to protect the privacy of the information in the appraisal report.
However, the Government also says that when a person pays for an appraisal, they are entitled to an entire copy (all the pages) from the client (i.e. lender). The appraiser can only share information with the client.

How is the value of a home determined?

1ST, the appraiser visits the home to see what it is like-it's size, age, condition, etc. The Appraiser takes pictures to show the Lender (a picture is worth 1000 words). The pictures are NOT taken to see if a person is a good housekeeper. Instead, the pictures tell about the materials the home is made from, and if there are amenities, like a fireplace, a custom kitchen, a vaulted ceiling, or other structural items that increase a home's value.

2ND, the appraiser drives around the neighborhood and gathers information about the neighborhood that may affect value, like distance to schools, maintenance of nearby homes, type of home styles, distances to shopping and businesses, etc.

3RD, the appraiser verifies public records at the courthouse to be sure who owns the home, and obtains information about the piece of land the home is on, taxes, etc.

4TH, the appraiser confirms information about other recent home sales similar to the subject home (comparable sales or comps) from real estate professionals and public records.

5TH, the appraiser puts the information into a report the client wants (there are over 30 different types of reports.)

Government rules for Appraisers (USPAP-The Uniform Standards of Professional Appraisal Practice) require that appraisers consider recent sales of homes in the local market (Sales Comparison Approach), the cost to build the home today minus depreciation for the home's age (Cost Approach), and income from home rental if it is rented (Income Approach).

Lenders are mainly interested in what a home may sell for (Sales Comparison Approach) in case they have to sell it to get their money back.

Look for additional articles regarding reasons why a seller may want an appraisal instead of a competitive market analysis (CMA) or a broker's opinion of value (BPO), why an estate needs an appraisal, how to find a good appraiser and why experience is THE most important quality in an appraiser.