An appraisal is an assessment of property value. This assessment is arrived at by utilizing a formal method that is based on one or more of three "standard approaches to value". The Sales Comparison Approach analyzes similar properties within the vicinity and finds value based on a comparison of those properties to the property in question. This is the most common approach is generally the most accurate and best indicator of value for a property. The Cost Approach analyzes what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value. The third approach - the Income Approach - is used to appraise income producing properties. It analyzes what an investor would pay based on the money generated by the property.
The most important party in deciding the worth of a home, an appraiser makes an unbiased opinion on the value of a property used in a real estate sale. Appraisers present their professional analysis in appraisal reports.
A residential real estate appraisal is usually required for buying, selling, and mortgage lending transactions. Other reasons for getting an appraisal report include:
To remove your Private Mortgage Insurance (PMI) requirement.
To settle an estate.
To use as a negotiating tool when selling or buying real estate.
To defend your rights in a condemnation case.
Because an official agency such as the IRS requires it.
If you are involved in a lawsuit - an appraisal could help.
To lower your property tax obligations.
An appraisal is very different from a home inspection. A home inspector investigates the structure and mechanical systems of a home, from the roof to the foundation. Generally, a home inspection report will discuss the amenities and the requirements of the property including air conditioning, electrical services, the heating system, and the plumbing. It also reports on the structural integrity of the home by inspecting the attic, visible insulation, walls, floors, ceilings, windows, foundation, basement, and other visible structures.
A Comparative Market Analysis (CMA) is created by a real estate agent and is based on market trends. A residential real estate appraisal is created by a licensed, certified professional who is an expert in property valuation. The appraiser is an independent voice, with no vested interest in the value of a home, unlike the real estate agent, whose income is tied to the value of the home.
Each report must reflect a credible estimate 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.
In communicating an appraisal report, each appraiser must ensure the following: * That the information analysis utilized in the appraisal was appropriate. * That significant errors of omission or commission were not committed individually or collectively. * That appraisal services were not rendered in a careless or negligent manner. * That a credible, supportable appraisal report was communicated.
Colorado requires real estate appraisers to be licensed first and then certified by the state. Licensing requires extensive education and 2000 hours of work experience under a certified appraiser. To become certified, appraisers must fulfill additional education credits and complete an additional 500 hours of work experience. In addition, appraisers must abide by a strict industry code of ethics and comply with national standards of practice for real estate appraisal. The rules for developing an appraisal and reporting its results are insured by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).
Appraisers may receive their work through Appraisal Management Companies (AMC's) or directly from a client. The entity ordering the appraisal (such as a mortgage company) places the order with the AMC who then distributes it to one of their approved appraisers in that area. Private clients order directly from the appraisal company itself.
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 property 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, such as Metro Appraisals' InterFlood product. 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 home or other real state property is being used to make a significant financial decision, an appraisal ensures that all of the people involved are working with the most up-to-date value. If you're selling your home, an appraisal helps you set the most appropriate value. 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. A home is often the single, largest financial asset anybody owns. Knowing its true value means you can the right financial decisions.
PMI stands for Private Mortgage Insurance. It ensures a lender against loss on homes purchased with a down-payment of less than 20%. Once equity in the home reaches 20% you can eliminate the PMI and start saving immediately.
After the appraiser does the initial property research, they will come to your home and measure it, determine the layout of the rooms inside, confirm all aspects of the home's general condition, and take several photos for inclusion in the report. The best thing you can do to help is to make sure the appraiser has easy access to the exterior of the house. Trim any bushes and move any items that would make it difficult to measure the structure. On the inside, make sure that the appraiser can easily access items like furnaces and water heaters. The following items will help your appraiser provide a more accurate appraisal in a shorter period of time: * A survey of the house and property. * A list of personal property to be sold with the house if applicable. * A copy of the original plans. * A list of recent items that have been updated within the past two years.
Market value or fair market value 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 home buyer pays for the report as part of the closing costs, the lender retains the right to use the report or any information contained within. The home buyer is entitled to a copy of the report - it's usually included with all of the other closing documents - but is not entitled to use the report for any other purpose without permission from the lender.
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. If not stipulated otherwise, the homeowner can use the appraisal for any purpose.
As a rule, the most value returned from renovating a home comes in the kitchen. According to one national survey, kitchen remodels returned an average of 88% of the investment. In other words, a $10,000 kitchen remodeling project would add approximately $8,800 to the value of the home. Bathrooms were second, returning 85%.
In some cases, buyers must consider that different markets value amenities differently. Adding a central air conditioner in Pueblo may add significant value to the property while putting one in a home in Gunnison might not have much impact due to their perspective climates.