Intro to Appraising – Norman Hubbard & Assoc. Nationwide Appraisal Management Co.

If someone is buying or refinancing a home, chances are your mortgage company will require that a professional appraisal be performed on the property as part of the loan approval process. If someone is involved in settling an estate or some other legal matter which includes residential or commercial property, your lawyer will need an appraisal to determine the value of the property for legal and/or tax purposes. In all cases, what is being sought is an “estimate of fair market value” for the property. That is, a reasonable expectation of what price the typical buyer would be willing to pay for the property under fair market conditions.

Why is a Professional Appraiser Needed and What Does He/ She Do?

Along with the Real Estate industry and the Mortgage and Banking industries, the Appraisal industry is highly regulated by the state government and by federal agencies as well. There are guidelines to be followed. Because the amounts of money lent on home mortgages are so high, and many lending decisions are based on the estimate of value supplied by the appraiser, these regulations are meant to protect consumers, lenders and investors.

The federal guidelines establish the types and amount of data required on an acceptable appraisal report, and two agencies which monitor large pools of mortgage money for investors (known as Fannie Mae -Federal National Mortgage Association and Freddie Mac -Federal Home Loan Mortgage Corporation) have developed standardized report forms for each type of property appraised. They have also created a standard model set to check 100’s of thousands appraisals against as further protection.

Each state has developed licensing standards and procedures for the industry to ensure that practicing appraisers are knowledgeable in all the guidelines and requirements and are also well versed in the ethics of the industry. The state also administers the licensing exams and recommends the acceptable coursework required. In order to qualify for licensing, apprentice appraisers must work under close scrutiny and supervision of a licensed or certified appraiser who thoroughly reviews his or her work.

All these precautions are in place to ensure that the estimate of value given on an appraisal report is as fair and defensible as possible; since it is, after all, an expert opinion of value and not a straight arithmetic computation.

What types of properties are appraised by a Residential Real Estate Appraiser?

Property that is or can be lived in by its owner comes under the jurisdiction of the Residential Appraiser. These include cooperative and condominium apartments of any size or location, townhouses, attached houses, detached single family houses, houses in planned communities with shared amenities (these are sometimes called Planned Unit Developments) multi-family houses from 2 to 4 units (larger would be considered a commercial property), vacation properties, historical homes and large estates.

For all these residential properties, large or small, the appraisal process is very similar. A residential appraiser can also appraise vacant land, mobile and manufactured homes; although some of these types of properties are appraised less frequently for mortgage purposes.

Property which supports a commercial enterprise or business such as a restaurant, church, school,  gas station, farm, retail store or whatever would require a commercial appraisal, in which the business itself contributes a large part to the valuation process. This is a different type of appraisal and is beyond the scope of this article. However, certain mixed-use properties such as predominantly residential houses with professional office or retail space can often be appraised by a residential appraiser, depending on the type of loan.

What the appraiser will do when appraising your property

1) Getting Ready for the Inspection:

When the appraiser calls to schedule the inspection appointment he or she may ask some preliminary questions about the property such as its size, age, style, lot size,  etc. This information can get him started on his initial research before he makes his own physical inspection. He may also ask for certain documents to be made ready for him to look at, such as a recent tax bill, deed or survey. These documents may also help speed up the research process. In preparing for the inspection itself, clients can be reminded that although furnishings, clutter, dirty dishes etc. won’t factor into the value estimate of the home, the appraiser will need access into all rooms in the house, including the attic, cellar and sometimes even the crawlspace. Therefore, tenants should be notified ahead of time, so they can provide access for the day of the inspection.

2) Inspecting the Neighborhood

Before even arriving to inspect the property, the appraiser will inspect the surrounding neighborhood. He is interested in availability of public transportation, conveniences such as shopping, schools, parks and recreation, and the approximate mix of residential, commercial and vacant land. From his data sources and experience in the area, the appraiser will also report on predominant prices, overall market stability and general market conditions in the neighborhood.

3) Inspecting the Subject Property

The appraiser will need to measure the house to determine its gross living area. This is usually done from the exterior. The appraiser will also make a walk through inspection of the property to see the room count, layout and general condition and quality of the construction materials. If the property owner has made any recent improvements such as new windows or skylights, updated kitchen or baths, added a deck or family room etc. it’s important to let the appraiser know.

Keep in mind however, that the cost of renovations are rarely if ever reflected in appraised value on a dollar for dollar basis. This is because the appraiser bases his value on what other buyers are paying for similar houses and/or amenities – not necessarily what they would cost to reproduce or build.

Also keep in mind that elements which would be considered matters of personal taste, such as decorator colors, choices of wall or floor coverings, or built-in design elements, are not usually considered in the evaluation process, for the same reason as stated above. While one “special” purchaser might be eager to pay extra for-built in drapery valences for instance or fall in love with a custom-designed wall-to wall carpet in the den, the appraiser must determine what an “typical” buyer would pay for the home and be able to defend his estimate with actual comparable sales with the same or similar amenities. Of course the overall quality of workmanship that went into the home, the level of architectural or design detail and the quality of materials are all-important factors that contribute to value.

Unheated rooms and/or rooms below grade are not usually considered as part of the living area square footage of the house, although they can contribute to overall value. If two houses are otherwise identical, for instance, the one with a finished basement would be worth more than one with an unfinished basement. Below grade means even partially below grade, so a walk out or “daylight” basement would still be considered below grade in most cases, even if three of its four sides were above ground. Other amenities such as garages, patios, fireplaces etc. are all considered and contribute to the overall value of the property. Lot size is taken from the tax bill or from town assessor records.

An appraiser is not an expert in environmental factors, radon or asbestos, structural engineering or pest infestation, so unless there is some visibly obvious problem, it probably won’t be mentioned on the appraisal report. However, if something should appear potentially troublesome to the appraiser such as a cracked foundation or piles of sawdust beneath the floor beams, an inspection by an appropriate professional might be recommended.

4) Selecting and Inspecting the Comparable Sales

After the property has been inspected and all pertinent data gathered, the appraiser then goes to his data sources to find recent sales of similar nearby homes. Ideally, these would be a minimum of three properties as close to the subject’s size, age, lot size, location, style and amenities as possible, which have passed title within the past six months. In certain areas such comparable sales are easier to find than others. Obviously, areas with heavy sales activity and many similar style and age homes provide a broader field than areas with very diverse types of housing and very slow turnover.

In any case, federal guidelines restrict what can be compared to what. For instance, the gross living areas of a subject property should be within 15% of the gross living area of each of the comparable sales. A 2000 square foot home should not be compared to a 3000 square foot home. They are not truly comparable. Likewise, a 2 bedroom home should not be compared to a 4 or 5 bedroom home, a house on a tenth of an acre should not be compared to a house on 2 acres, nor should a 100 year old Victorian farm house be compared to a 3 year old Raised Ranch. Also per the federal guidelines, all comparable sales should have passed title within 6 months of the appraisal report.

If three closed sales meeting these criteria don’t exist, then the appraiser must exceed the guidelines, preferably as little as possible. He may choose to broaden the geographic area, trying to keep to as similar a market area and neighborhood as possible. He may need to go back further in time, to sales that closed over six months ago. He may need to compare houses of different sizes. But he must try to keep as many factors as similar as possible. Properties with unique amenities, such as waterfront, unusual views, horse barns or the like should be compared to at least one or two other properties with a similar amenity, otherwise it is nearly impossible to determine what such an amenity will bring on the market. Truly unique homes, such as architect designed “signature” houses or ones with historic landmark status present special difficulties for the appraiser, since they are almost by definition incomparable to anything else. Here he has to use his best judgment and experience to select comparables that meet as many of the guidelines as possible, and defend his choices well in a narrative addendum to the report.

Once the appraiser has selected the best comparable sales to use, he drives by them to inspect their exterior. This is to ensure that they are truly in the same market area as the subject, that there are no external factors that would have affected their sales price such as heavy traffic, nearby railroad tracks or power lines etc. and that the house was accurately described in whichever data source was used. If there are any noticeable discrepancies more research would be done. For instance, if the comparable seemed much larger than reported, it could have been expanded after the sale, which would not affect its use as a comparable in the report, or the data could have been inaccurate, in which case it may no longer be suitable for inclusion. For all interior amenities such as bedroom and bath count, updated kitchens or finished basements and such things, the appraiser must rely on the published data source for accurate information. If he has reason to suspect the published source might be in error, has can do further research with the town or the sales broker to determine the truth.

5) Writing the Report – The Evaluation Process

All the data which has been gathered so far has a place in the standardized report forms. Not all of it contributes directly to value; but it communicates about the property in a detailed way, and in familiar and well understood terms, to a lender who may be in a distant location and unfamiliar with the particular market area. Much of the data regarding the neighborhood, site and construction of the property on the standardized forms fall into this category.

Types of Valuation:

There are three methods of estimating value on the Federal Uniform Residential Appraisal Report (URAR) form:

The cost approach attempts to estimate value by estimating the cost to build the property from scratch, given estimated land value and costs of materials etc. Then depreciation is taken based on the subject’s age and any external factors such as proximity to noise, traffic etc. Because there are so many variables and so much estimating in this approach, it is not usually relied on as an indicator of value, except when appraising new construction, when it is a very good indicator of value. Otherwise, it is mostly used to give support to the value found by other methods.

The income approach is a larger factor in appraising income properties, where a comparison of market rents for the area is also included, but is usually not applicable in appraising owner occupied single family residences. This approach attempts to estimate value based on the rental income potential of the property.

The most relied upon method of valuation is called the sales comparison approach. Using this method, the appraiser seeks out public records of recent property sales which most closely approximate the subject property in size, style, age, lot size, location, condition and various amenities. Each of these comparable properties is related to the subject on an item by item basis on a grid; and adjustments are made for any significant differences found. If there are too many differences, or the differences are too substantial, the comparable is not truly comparable, and would not be used, unless no other closed sales exist in the area. The more similar the comparable properties used, and the more recent the sales transactions, the better.

It is in this grid comparison process that most of the “art” side of the appraisal process is evident. The appraiser must use his best judgment and experience to determine what value figures to use to adjust between parcel sizes for instance, or houses with or without central air conditioning, or houses of different architectural styles or ages. Obviously, the value ascribed for each of these things would be different depending on location (an extra tenth of an acre in a densely populated city might be worth more than in a suburb for instance) house size (central air conditioning in a 1200 square foot home may not be worth as much to a purchaser as in a 4000 square foot home) or other factors. And, as stated earlier, the appraiser does not base these numbers on cost, but on how much “typical” buyers have paid for the added amenity or inversely, how much less “typical” sellers have accepted for lack of the amenity.

Each of the comparable sales has an actual sales price; and after the grid has been completed, there is also an adjusted value for each comparable. The final estimate of value given by the appraiser to the subject property should fall within the range of sales prices, both actual and adjusted. There is no exact equation followed, again, the appraiser must use his best judgment based on the market area and the suitability of the comparable sales. But ideally, the appraised value should most closely approximate the adjusted value of the most recent, most similar comparable sales, which should also be fairly close to the actual sales prices of those comparables, if the adjustments are few and small.

For how long is an appraisal valid?

Per Federal Guidelines, an appraisal is valid for 120 days from the date of inspection. If it seems that this time frame might need to be extended, an Updated Appraisal can be performed by the original appraiser within that 120 day time frame to extend the life of the appraisal an additional 120 days.

Other appraisal actions that a lender might require:

Inspections – If the subject property was under construction at the time it was appraised, or if it needed any repairs or alterations per the original report, a final inspection would be required to ensure that the conditions set forth in the report had been met. This involves a physical interior inspection of the property and a short written report to accompany the original appraisal report.

Updated Appraisal- 1004D – As briefly mentioned above, an Updated Appraisal can be performed within 120 days of the appraisal date to extend the validity of the original report. The appraiser must drive by the subject property to ensure it is still in similar condition, and research recent comparable sales in the market area to determine if the original estimate of value is still valid and supported. A letter summarizing the appraiser’s research findings is provided along with current exterior photos of the subject property.

Drive-by Appraisals – This is an abbreviated appraisal, similar is content to a full appraisal but requiring less detailed information and no interior inspection or measurement by the appraiser. Data regarding the subject property is often gathered from the assessor records and/or verbally from the homeowner and the grid used to get adjusted values for comparable sales is shorter and less detailed. Requesting a drive-by appraisal allows a lender to get a good “ball park” idea of value for a lower cost to the consumer, and is often sufficient for second mortgages or home equity lines of credit.

Field / Desk Review – Sometimes one appraiser is asked to review a report performed by another appraiser in a different firm. The possible reasons for this are several – routine quality assurance checks by the lender, a lender wants to use an appraisal from an unapproved appraiser and needs the review performed by one that’s officially approved, a lender suspects a technical problem with a report and wants it verified. In a review appraisal, the data used and the judgments of the original appraiser are examined for accuracy, completeness and defensibility. There are standardized federal forms for a review, just as for all other types of appraisals.

Rent Surveys, Operating Income Statements – For non owner occupied or income properties, a survey of similar market rents and/or a report of operating income versus expenses is required to give the lender an idea of the income to be expected from the unit and its costs to operate. A survey of rental comparables is built into the standard report form for small residential income properties. But sometimes, single family units are used for investment or income purposes, and then a separate survey might be requested.

Carol Hubbard, Executive Director