Description Of A Real Estate Appraisal
A real estate appraisal is a little different depending on your regional area and the type of appraisal that is being done. However, you'll be dealing with the same general appraisal process and business. There are many different types of appraisers, some of which include: commercial real estate appraisers, residential real estate appraisers, furniture appraisers, jewelry appraisers, art appraisers, automobile appraisers, and the list goes on. We're going to concentrate on residential real estate appraising in this book.
How does an appraiser estimate value? Appraisers are taught to estimate value by following three recognized approaches. After analyzing the results of the analysis conducted, an appraiser then develops a final estimate or opinion of value. The 3 approaches to estimate value are:
Direct Sales Comparison Approach - Compares similar, recently sold properties to the subject property.
Cost Approach - Estimates the cost to replace or reproduce the subject property being appraised.
Income Approach - Estimates what a prudent investor would pay for the subject property based on the income the property produces.
A real estate appraisal is an estimate of market value based upon the opinion of the appraiser. You're not stating the exact price that the property is worth in your appraisal report. You only give an estimate of the market value. Two separate appraisers are considered accurate if their value estimates differ by a maximum of 10% for the same property. The reason for this is that generally no two people will pay the identical price for a property. One buyer might like the house a little bit more than another buyer and so he would pay more, and vice versa. Therefore, when you estimate market value, you're merely giving your opinion. Your opinion will be based upon all of your field work and data. The estimated value in your appraisal report is the price you feel that the majority of the typical buyers in the area would pay for the subject property.
- Definition of Market Value - The definition of market value that applies to HUD/FHA is cited from the Uniform Standards of Professional Appraisal Practice. (HUD is the U.S. Department of Housing and Urban Development. FHA is the Federal Housing Administration). This is the definition of value which must be used for all appraisals performed for FHA-insured mortgages:
- "The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and 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:
The buyer and seller are typically motivated.
Both parties are well informed or well advised, and each is acting in what they consider their best interest.
A reasonable time is allowed for exposure in the open market.
Payment is made in terms of cash in United States Dollars or in terms of a financial arrangement comparable thereto.
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions.
An appraisal involves a visual, limited time, nondestructive inspection of the subject property that you're appraising. There's no dismantling or using tools to take things apart. However, you will need some tools to help you on the appraisal. I'll tell you what tools you need a little further on in this book.
You're a real estate appraiser, you're not a repairman. Tell the client to have something checked out by a licensed contractor if it's not operating properly, or if you have any doubts about its present condition. This means that you don't need to know how to fix everything in a house. All you need to do is to be able to identify a problem, or identify whether the operating systems are working properly. To make this point more clear, I'll use an analogy with your car. Normally, you know when your car isn't running properly or if there's a problem with it. However, you don't need to know how to fix the car. All you need to do is identify that something is wrong and that a repairman needs to check it out further. You just bring the car to an auto mechanic and let them tell you exactly what's wrong and what it will cost to repair the problem.
As a real estate appraiser, you're not required to be the Wizard of Oz. You're not required to have a magic wand that reveals every, single problem with the house and site. You're not required to have X-ray vision to see things behind walls, ceilings or other finished areas. You're not required to have a crystal ball to foresee all potential problems that will arise in the future with the subject property. (However some people expect you to have all of these qualities).
As an appraiser you check all visible, accessible areas and operating systems, such as, heating, air-conditioning, electrical, plumbing, the roof, etc. Everything should appear to be operating properly and in satisfactory condition at the time of the appraisal.
You'll find that real estate appraising is a very interesting career. There are many different aspects that go into an appraisal report. There are photographs, some field work, some analysis of different data sources, some math calculations, etc. It's a very satisfying feeling to know that you can do very thorough appraisals.
Often when people find out that you're an appraiser they'll ask you, "What's my house worth?" For some strange reason people think that appraisers have some magical power. They believe an appraiser can just look at a property and be able to tell you what it's worth. You will get asked that question, (many times if you go into this business). If you do, just politely tell them that an appraisal is a lot of field work. It's similar to doing a written report for school. There are no shortcuts to doing a good appraisal.