| What is an appraisal?
An appraisal is a thought process leading to an opinion of value. This opinion or estimate is arrived at through a formal process that typically uses the three ''common approaches to value''. They are the Cost Approach - which is what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value. There is the Sales Comparison Approach - which involves making a comparison to other similar, nearby properties which 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 of most importance in appraising income producing properties - it involves estimating what an investor would pay based on the income produced by the property.
Notice to Borrowers and Homeowners
ALTHOUGH YOU MAY HAVE PAID A FEE FOR YOUR APPRAISAL (EVEN IF YOU PAID THE APPRAISER DIRECTLY), THE LAW PROHIBITS THE APPRAISER FROM PROVIDING YOU WITH A COPY OF THE APPRAISAL REPORT WITHOUT THE CONSENT OF THE LENDER.HOWEVER, IF YOU PAID FOR THE APPRAISAL, YOU ARE ENTITLED TO A COPY OF IT FROM YOUR LENDER.When an appraisal is performed for a lender, the borrower/homeowner is NOT entitled to a copy of the appraisal report from the appraiser.
This is because the appraiser's client is the lender, not the borrower, even though the borrower pays the appraisal fee. A client is defined as the party who directly engages the appraiser to perform the assignment. The client is most commonly a mortgage broker, mortgage banker, or direct lender if the purpose of the appraisal is for a loan transaction by 1-4 unit residential real property (for purchase or refinancing purposes).Appraisers receive and accept many appraisal assignments from clients specifically instructing them to collect the appraisal fee at the door (or "C.O.D.") from the borrower. It is considered a common and generally accepted practice for the appraiser to collect this payment directly from the borrower on behalf of the client to compensate for the appraisal service. However, this does not render the borrower as the client or entitle them to a copy of the appraisal from the appraiser.The appraiser is required to protect the confidential nature of the appraiser-client relationship, and thus is prohibited by law to provide a copy, or disclose of his appraisal report to anyone other than the client. Any licensed appraisal violating this portion of the Uniform Standards of Professional Appraisal Practice (USPAP) may be subject to disciplinary action by the Office of Real Estate Appraisers (OREA).Although the appraiser cannot provide the borrower with a copy of the appraisal without the client's permission, the borrower has every right to receive a copy of the appraisal from the lender, provided he or she has paid for the appraisal and the loan involves 1-4 unit residential property. According to California Business and Professions Code Section 11423, a borrower has up to 90 days after the lender has provided notice of their lending decision to submit a written request for a copy of the appraisal.
What does an appraiser do?
An appraiser provides a professional, unbiased opinion of market value, to be used in making real estate decisions. Appraisers present their formal analysis in appraisal reports.
Why would a person need a home appraisal?
There are many reasons to obtain an appraisal with the most common reason being real estate and mortgage transactions. Other reasons for ordering an appraisal include:
- To obtain a loan.
- To lower your tax burden.
- To establish the replacement cost of 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.
What is the difference between an appraisal and a home inspection?
The appraiser is not a home inspector nor does he/she do a complete home inspection. An inspection is a third-party evaluation of the accessible structure and mechanical systems of a house, from the roof to the foundation. The standard home inspector's report will include an evaluation of the condition of the home's heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.
What is the difference between an Appraisal and a Comparative Market Analysis (CMA)?
Simply put, the difference is night and day. The CMA relies on vague market trends. The appraisal relies on specific, verifiable comparable sales. In addition, the appraisal looks at other factors like condition, location and construction costs. A CMA delivers a ''ball park figure.'' An appraisal delivers a defensible and carefully documented opinion of value.
But the biggest difference is the person creating the report. A CMA is created by a real estate agent who may or may not have a true grasp of the market or valuation concepts. The appraisal is created by a licensed, certified professional who has made a career out of valuing properties. Further, 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.
What does the appraisal report contain?
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.
After completing the report, what assurance is there that the value indicated is valid?
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.
Most states require that real estate appraisers are state licensed or certified. The state licensed or certified appraiser is trained to render an unbiased opinion based upon extensive education and experience requirements. To become licensed or certified, appraisers must fulfill rigorous education and experience requirements. 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).
How are appraisers certified?
Regulations regarding licensing and certification of Real Estate Appraisers vary from state to state. However, licensing and certification is most often associated with many hours of coursework, tests and practical experience. Once an appraiser is licensed, he or she is required to take continuing education courses in order to keep the license current.
Who do appraisers work for?
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 and investment decisions.
Where does an appraiser get the information used to estimate value?
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, such as a la mode's 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.
Why do I need a professional appraisal?
Anytime the value of your home or other real property is being used to make a significant financial decision, an appraisal helps. 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.
What exactly is PMI and how can I get rid of it?
PMI stands for Private Mortgage Insurance. It insures 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.
How do I get ready for the appraiser?
The first step in most appraisals is the home inspection. During this process, the appraiser 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 of your house for inclusion in the report. The best thing you can do to help is 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, if available, will help your appraiser to provide a more accurate appraisal in a shorter period of time:
- A survey of the house and property.
- A deed or title report showing the legal description.
- A recent tax bill.
- A list of personal property to be sold with the house if applicable.
- A copy of the original plans.
What is ''Market Value?''
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.
Who Actually Owns the Appraisal Report?
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 home owner 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 home owner can use the appraisal for any purpose.
Which home renovations add the most to the price?
The answer to this is different depending upon the location of the home. Different markets value amenities differently. Adding a central air conditioner in Houston, Texas may add significant value, while putting one in a home located in Buffalo, New York might not have much impact.
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%.
Downey denial debacle commentary:
It can be frustrating if you're a loan broker submitting an appraisal report to a bank only to have it returned to you. You hire the appraiser. The borrower pays the appraiser C.O.D. The appraisal is prepared & sent to the bank only to find out that the appraiser is not on the bank's approved list. Some banks like Downey have a policy that the signing / supervising appraiser should actually visit the property. You will find that any thriving appraisal practice commonly deploys trainee appraisers to the subject property being appraised so long as the transaction value is under one million dollars. Trainee appraisers need 2,000 hours of field experience before a full appraisal license can be granted by the state. Often, an appraisal firm will hire trainees to conduct the inspections while the supervisory appraiser does the supervision on the report itself. If there is a high demand of appraisal reports on any given day, the supervisory appraiser cannot physically be at every property. This is where the trainee appraiser is critical. On the appraisal report, if the trainee-licensed appraiser is to sign as the appraiser, then the supervisory appraiser would sign on the bottom right & check the "Did Not" inspect property box. Every so often, a bank may prefer the trainee appraiser not sign on the bottom left but rather have the supervisory appraiser sign on the bottom left. As long as the proper USPAP departure disclosures are met, noting any departures from Standards Rules 1-2, 1-3, 1-4, plus any USPAP-related issues requiring disclosure, (this is done using form ID3 or the USPAP identification, otherwise known as the Appraisal And Report Identification form) trainee appraisers are allowed to conduct the field inspections. Their involvement in the appraisal would then be disclosed in the report and the supervisory appraiser would sign on the bottom left of the appraisal reconciliation page. Only a handful of banks frown upon this practice though the rules of USPAP (Uniform Standards of Professional Appraisal Practice) allows for it. How else are trainee appraisers to obtain their 2,000 hours if banks make it their policy not to accept appraisals that were signed by them or inspected by them? Prior to being fully licensed, I too was under the tutelage of a top-notch highly respected appraiser. He would never push value & would often turn down deals from aggressive lenders. Though he was an honorable appraiser, he too is not approved through Downey due to another similar situation. Downey does not have an "approved list" but only a list of appraisers not to work with. Their list is growing ever so fast. And they do not have an appeal process to get re-instated once they disclose why you were ousted. The disclosure is done as follows: A loan broker hires the appraiser for a property. The appraiser is often times paid in advance. Once the appraisal is submitted to Downey, the folks at Downey tell the loan broker that the appraiser is not approved instead of telling the appraiser directly which would have saved the loan broker time & money. Usually the loan broker's lock is lost & title / preliminary documents must be ordered all over again. And another appraiser must be hired. Often, this is an inconvenience to the local loan brokers Downey appeals to, because of their mortgage broker rebate program, who now must search down the list of appraisers that have not been discarded by Downey. To the loan broker community, Appraisal Matters would like to express our apology for this inconvenience to you. If you feel to voice your opinion to the management at Downey regarding their non-reinstatement policy once an appraiser has been added to their declined list, here is some contact information: Herb Cuesta, Review Appraiser, License #AG002269, Downey Savings, 21052 Providence, Lake Forest, CA 92630, Ph: (949) 725-4830; Dave Gibbs, Account Executive; Ken Parsley, Regional Manager; Don Smith, Regional Appraisal Manager, Ph: (949) 725-4840 & Fax: (949) 854-8781 & E-mail: DonSmith@DowneySavings.com. Downey is located at: Corporate Headquarters, Downey Savings and Loan Association, F.A. 3501 Jamboree Road, Newport Beach, CA 92660, (949) 854-3100, www.DowneySavings.com. Note: We have provided this disclosure as a service to the loan broker & appraiser community. We've spoken with many appraiser colleagues about this issue. We receive e-mails from time to time asking Appraisal Matters if we would review & sign a report from another appraiser that went through the process of completing a full appraisal only to find out that they are also not approved with Downey. Our recommendation every time is to offer the loan broker a partial or full refund as a customer service gesture & have them hire another appraiser from scratch. If the existing appraisal report that was initially rejected by Downey is utilized to any degree in the new report, even after the new appraiser personally inspects the property, Downey will reject the appraisal again now adding a new appraiser to their rebuked list. -
Appraisal Matters Inc. Staff.