An appraisal is a written estimate or opinion of property value supported by the statement and analysis of relevant property data. An appraisal does not establish or create value, but provides a fact-based value estimate. There are different types of appraisals, and they are used for different purposes. For example, if you are considering purchasing a property, you may want to know what it is worth in order to make a fair offer to buy. Or, if you are applying for a loan to purchase this property, the bank or mortgage company will require an appraisal so that they are confident that the amount of money that they are lending for this property is protected by the value of the property.
Appraisers, who are required in all states to meet uniform education, testing, and experience requirements, are paid a fee for their services based upon time and expenses. Usually they charge a specific fee for a specific appraisal service but are prohibited by law to charge a percentage of the appraised value as this constitutes a conflict of interest.
Why are appraisals so important?
The most common and most important reason for real estate appraisals is to estimate loan value. This helps determine whether a property offers the mortgage company sufficient security/value to approve a mortgage loan to a buyer. On conventional mortgage loans, such appraisals can be made by the mortgage company or outside/independent appraisers. On federally sponsored loans, such as Rural Development or Veterans Administration mortgages, only government-approved appraisers may be used.
An appraisal may also be requested by a seller to assist in estimating the appropriate sales price, or by a buyer to assist in determining how much to offer for a property. An appraisal may also be needed to settle an estate by determining the worth of the property at the time of the owner's death. Appraisals may also be required for various legal reasons, such as to determine the value for assessing real estate taxes, for condemnation proceedings, or to advise the courts, planning, and zoning boards of the impact of certain use decisions.
There are many reasons to obtain an appraisal. The most common reason is for real estate and mortgage transactions, but we have compiled a list of other reasons you may need to order an appraisal.
An appraisal may be needed:
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. to allow you to obtain a qualified appraisal report. because a government agency such as the IRS requires it. you are involved in a lawsuit. |
Determining Market Value
The most common appraisal assignment sought is to establish market value. This is the highest price (or most probable price) the property will bring between a willing seller and a willing buyer. The three conditions that most affect market value are location, size of the property/structure, and condition. Market price, on the other hand, is what the property actually sold for. Market value and market price are often different numbers - and what the owner actually paid for the house has no bearing on the market value.
What affects Market Value?
Physical factors - topography (contour of the land), drainage and soil characteristics, and man-made factors such as roads, bridges, and dams
Economic factors - Interest rates, employment rates, business trends, general local economic climate
Political factors - Building and construction codes, environmental restrictions, planning and zoning restrictions, highway construction projects
Demographic factors - Population, growth rate, birth rate, and other factors.
The Appraisal Process
The appraiser identifies the appraisal requirements, inspects the neighborhood, inspects the property, and collects relevant data including information on the region, the community, the size and dimension of the lot(s), street improvements, utilities, drainage and flood plain data, zoning, taxes, and building characteristics.
The appraisal approach is selected. The three methods of approach are selected based upon the nature of the subject property. These approaches produce different value estimates, as they are based upon different assumptions as to what determines value. It is the appraiser's experience that determines which of the three approaches will be used to perform the appraisal on a specific property. These approaches are:
| The Cost Approach - This type of appraisal is based on the assumption
that value is determined by what it would cost to duplicate the property.
This method is favored when the property is unique or is unlikely to produce
rental income. This includes churches, schools, libraries, businesses, or
very unusual homes. The cost approach is based on the cost to reproduce
the building, less depreciation. Reproduction cost produces an exact copy
(or "clone") of the building using identical materials and construction
methods as when the building was originally built. This should not be confused
with replacement cost, which produces a similar property using today's materials
and technology, with the end result being a property of similar utility.
The Income Approach - This type of appraisal is based on the premise that a property's value is based on the present value of future net income it is expected to generate. Therefore, a property which produced a greater amount of income than another would be considered more valuable, even if all other characteristics were identical. This approach is used to estimate the value of revenue producing buildings such as apartments, shopping centers, and commercial buildings. Since this appraisal method relies upon the capitalization of income, it is sometimes called the Capitalization Approach. The Market Data ("Comparable Sales") Approach - This type of appraisal is based upon the premise that a property's value is estimated by comparing the property in question with other units of similar characteristics which have recently sold. This is the most commonly used appraisal approach and is most applicable when data on comparable property is readily available, as with single family homes, condominium units, or land. The key to success with this appraisal method is selecting the right properties for comparison, as inappropriate ones will have a detrimental effect on the value assessment. Information on comparable sales is most often obtained through multiple listing services and deed transfer documents. Data which should be compared includes the date of sale, address, lot size, size and condition of the structures, property style and features, financing terms, and current market conditions. Comparable sale units need not be duplicates, but should be selected to approximate the property, and the comparable sale dates should be recent enough to be meaningful. |
After an appraiser has applied the most appropriate appraisal approach, a single value estimate is then made. Since a different conceptual basis is used with each approach, the values derived by applying the selected approaches will vary. The appraiser will use professional judgment and expertise in weighing the results of each method, depending on the nature of the property and the objective of the appraisal. The results are not just taken and averaged - this phase of the appraisal is critical to a proper value estimate and relies heavily on the appraiser's judgment.
In the real world, very few individuals order appraisal reports to establish an offering price or to substantiate a purchase price. At the point that an offer to purchase (in a typical residential transaction) is made, the price has been set by other parties, not the purchaser. The price has been determined by the seller, who wishes to obtain the highest price possible, or the agent, who receives a percentage of the price as compensation and often represents the seller in the transaction.
The real estate agent will typically perform a comparative market analysis (CMA). The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser's license or certification. A CMA is a necessary part of the agent's preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent's experience and the characteristics of the property. The agent will suggest a selling price to the seller based upon the analysis. However, neither the seller nor the agent are bound by the results of the analysis, and the agent is not required to follow any formal procedure in completing the CMA. If a seller wishes to list the property at a price higher than the price suggested by the agent, then the agent may be forced to accept the listing at that price or risk losing a commission.
Purchasers believe that they are getting a good deal if they make an offer lower than the listed price. But how far above the market value was the property listed? 10%, 15%, maybe even 20% above the fair market value? A negotiated price of 10% less than the listed price on a property that was listed at 20% above its value is not a bargain. The listing agent cannot tell the purchaser that the offered price is higher than the value, or even higher than their own CMA. If the buyer is unfamiliar with the real estate market they should be represented by a buyers agent who can advise them on the property's value and assist in negotiating the purchase.
The seller of a property may want to order an appraisal before listing the property. Of course, the cost of the appraisal is always a deterrent, especially if the seller knows that a buyer will pay for it when applying for a loan. But the appraisal is often justified. The seller could lose a sale if the property appraised for less than the sale price when appraised by the appraiser.
OHIO CAPITAL CORPORATION FOR HOUSING