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. 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. To see 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%. Why won't appraisers do a comp check for me? Appraisers are governed by the Uniform Standards of Professional Appraisal Practice, or USPAP. Among the many restrictions of USPAP is one that prohibits appraisers from accepting an assignment to appraise a property based on a predetermined value or range of value. So for example, if an appraiser performs a comp check to find out if a home will appraise for at least a certain amount and it will, he or she cannot then accept the assignment to do the actual appraisal from you. In performing a comp check, he or she by definition has actually already performed a type of appraisal and must maintain complete records showing how and when they arrived at the figures they quoted you in the comp check. The logic of this USPAP rule is to prevent dishonest appraisers from being tempted to over-appraise properties, combat predatory lending practices, and prevent fraud in the market place. The other reason is one of economy. Appraisers are often asked to do as many as 10-20 comp checks a week and some much more than that. And since many comp checks will reveal that the requested value is not feasible, free comp checks can result in many lost hours of valuable work time. Appraisers understand why lenders want to check the value of a property before proceeding with the loan and are not insensitive to your needs, but legal issues and business practicality make free comp checks by an appraiser next to impossible. The correct and legal way to basically get the same result is to send an appraisal request with an estimated value (if legal in your state) and a statement that if the customer’s estimated value is incorrect, please advise before a trip is made to the property. The appraiser then calls the borrower and gets them to commit to an appraisal appointment time and then the appraiser schedules an appointment time. Then when the appraiser is doing their preliminary research and they see that it is not coming in at that value, we will definitely give you a call before we go out to the home and/or any money is spent. What is USPAP? USPAP, which you might hear pronounced like "YOOS-pap," is the Uniform Standards of Professional Appraisal Practice. USPAP is published and maintained by the Appraisal Standards Board (ASB) of the Appraisal Foundation, a non-governmental entity charged by Congress with promulgating appraisal standards. USPAP is revised periodically, usually every year. It begins with a list of Definitions, and a Preamble defining the mission. It then declares a set of general Rules governing all disciplines of appraisal practice: The Ethics Rule, the Competency Rule, the Scope of Work Rule, the Jurisdictional Exception Rule, and the Supplemental Standards Rule. It then sets forth 10 appraisal Standards, each containing a number of Standards Rules. Each Standard covers in detail the different tasks an appraiser might perform in the course of developing and reporting an appraisal ("Real Property Appraisal Development"; "Real Property Appraisal Reporting"; "Business Appraisal, Development"; etc.). It includes a number of Statements on those 10 appraisal Standards, some retired, which are used to clarify or supplement the Standards. It also includes Advisory Opinions dealing with the application of the USPAP in various scenarios, such as "When does USPAP apply in valuation services?" and "Clarification of the client in a federally related transaction," which describe real-life problems and how they would be governed under the Rules and Standards of USPAP. Every appraiser is charged with knowing and following USPAP, usually by operation of state law, and must complete Continuing Education periodically to relearn the basics and become familiar with new Advisory Opinions and annual changes to USPAP. USPAP may be considered the Bible of appraisal practice. Why hire a technically advanced appraiser? We all know them. The guys with pounds of silicon hanging from their belts. Every new gadget that has hit the market in the past 10 years has done time around their waist. Call them geeks. Call them nerds. Call them what you will, but by all means, give them your appraisal business. Why? I'm glad you asked. Appraisers are, by far, the most technical agents in the real estate world. By necessity, they have been drawn into the digital world at a pace not seen by their colleagues. The appraisal process is one that lends itself to technology. And technology has paid significant dividends to those appraisers who have invested in it. These dividends are shared with the appraiser's customers, in the form of shorter turn-around times and a much better final valuation report. Ordering Let's start at the beginning. Millions of real estate transactions are processed each year in the United States. Almost all of them require some sort of appraisal. Technology has allowed savvy appraisers to reduce the amount of work their client's need to order, track and receive appraisals. In the past, the primary mode of interaction between an appraiser and his clients was the telephone and fax machine. Clients would send requests via fax, and then often follow it up with a phone call to make sure it was received. Tracking the progress of the appraisal meant more phone calls - a disruption for both the client and the appraiser. But the modern, technologically advanced appraiser has a better method. Using tools like this web site - complete with the ability to order appraisals on- line - allows clients to shave valuable time off the process of ordering and tracking appraisals. Technologies like a la mode's net.X network are advancing this concept even further, giving its users the ability to not only order appraisals, but track their progress all the way until delivery. No more annoying games of phone tag! Data Gathering The appraisal process is nothing if not a data intensive process. Appraisers spend a lot of their time gathering both specific information about the subject property and general data about the local market and developing trends. Once again, technology has stepped in to help appraisers. In the past, the home inspection process has been the time consuming and difficult. To top it off, appraisers then had to come back to the office and transcribe their field notes into the appraisal file itself. No longer. Today's digital appraiser has several tools that can aid in gathering data in the field. Starting with tools like a la mode's Pocket TOTAL, appraisers are eliminating the duplicate data entry problems of the past. Tools like the Leica Disto Laser meter are making the measurements more accurate. And software like Apex's PocketApex allows the appraiser to sketch the house on the fly. All of this means that the appraiser can get the report done and delivered to the client in a fraction of the time it once took. On the other side of the data gathering coin is the general data. The Internet has revolutionized the ability of appraisers to get quality data in a fraction of the time it once took. Where once an appraiser would spend hours finding the right location maps and then rubbing on decals, the modern appraiser gets his maps with a few mouse clicks, complete with location markers. And flood maps? Likewise just a few clicks away using services like a la mode's FloodSource. Standardized addressing, accurate postal coding, census tract information, are all at their fingertips. This ensures that the final report is as complete and accurate as possible, requiring fewer call-backs and revisions. A real money saver for busy appraisal clients. Report delivery The report is done. Now how is the digital appraiser going to leverage his investment in technology to improve the delivery process? Modern appraisers have forsaken the old print-and-snail mail route for a much more efficient electronic delivery system. Utilizing Adobe's Portable Document Format (PDF) files, an appraiser can deliver a complete, multi-page report, complete with digital photos and maps, through simple e-mail. Now, instead of waiting for the daily mail, or paying for expensive courier services, appraisal customers can simply log into their company email system and retrieve all the appraisals at one time. Without wasting and paper printing the appraisal, it can be routed to the appropriate loan officer or title company in the blink of an electron. More advanced organizations are leveraging a la mode's net.X network to not only order appraisals, but also to manage the delivery process. Before an appraisal is ever delivered, this cutting edge technology reviews the report and ensures that it meets certain guidelines. Have enough comparables been used? Has the appraiser included a statement of limiting conditions? These items can be checked automatically and the appraiser notified of the deficiency without the client ever getting involved. Now, when the final report is received, the client can be sure the appraisal meets all the basic criteria. Once again, costly follow up and revisions are avoided, lowering everybody's cost of doing business. Digital Workfile It would be wonderful if appraisers could complete a report, deliver it and never worry about seeing that document again. But one of the purposes of an appraisal is as a legal document outlining the condition of the property at the time of sale. So appraisers must keep their reports for 5 years, allowing them to recall any appraisal at any time to either defend the valuation or to be used in other legal proceedings. Here again, the digital appraiser leverages his investment in technology to improve service. By storing every aspect of the appraisal - notes, sketches, supporting documentation and calculations - along with the appraisal, the professional is able to retrieve that report at any time within the five years and recall just what that report was about. And this data is not stored in boxes stacked 5 deep in some rented warehouse. Instead, the digital appraiser uses technology like a la mode's Digital Workfile to electronically include all supporting documents as part of the appraisal file. These files are stored securely on searchable media, such as a la mode's Vault, where the appraiser can find them in a fraction of the time required in the past. This helps appraisal clients by giving them immediate, virtual access to any appraisal they've ordered within the past 5 years. These are just a few examples of how technologically advanced appraisers are improving the business workflows of their customers. Investing in the right software, services, gadgets and gizmos allows the appraiser to deliver reports quicker, more efficiently and with higher degrees of accuracy. All of which helps keep the appraiser's costs down, and save his clients time and money. How do I Prepare for an Appraisal? For homeowners, a real estate appraisal is the linchpin to buying or selling their home. It allows the property transactions to occur among the buyer, seller, real estate agent and mortgage lender. Before an Appraiser arrives, there are a few things you should know. By law, an appraiser must be state licensed to perform appraisals prepared for federally related transactions. Also by law, you are entitled to receive a copy of the completed appraisal report from your lender. To facilitate the appraisal process, it's beneficial to have these documents ready for the appraiser: A plot plan or survey of the house and land (if readily available) Information on the latest purchase of the property in the last three years Written property agreements, such as a maintenance agreement for a shared driveway List of personal property to be sold with the home Title policy that describes encroachments or easements Most recent real estate tax bill and or legal description of the property Home inspection reports, or other recent reports for termites, EIFS (synthetic stucco) wall systems, septic systems and wells Brag sheet that lists major home improvements and upgrades, the date of their installation and their cost (for example, the addition of central air conditioning or roof repairs) and permit confirmation (if available) A copy of the current listing agreement and broker's data sheet and Purchase Agreement if a sale is "pending". Information on "Homeowners Associations" or condominium covenants and fees. A list of "Proposed" improvements if the property is to be appraised "As Complete". Once your appraiser has arrived, you do not need to accompany him or her along on the entire site inspection, but you should be available to answer questions about your property and be willing to point out any home improvements. Here are some other suggestions: Accessibility: Make sure that all areas of the home are accessible, especially to the attic and crawl space Housekeeping: Appraisers see hundreds of homes a year and will look past most clutter, but they're human beings too! A good impression can translate into a higher home value Maintenance: Repair minor things like leaky faucets, missing door handles and trim FHA/VA Inspection Items: If your borrower is applying for an FHA/VA loan, be sure to ask your appraiser if there are specific things that should be done before they come. Some items they may recommend might be: Install smoke detectors on all levels (especially near bedrooms); install handrails on all stairways; remove peeling paint and repaint the effected area; provide inspection access to the attic and crawl spaces. What is PMI and how to get rid of it? Assuming a decent credit rating, any potential home buyer can secure a loan for a house. Why? Because these transactions are secured by a very valuable asset: the home itself. If a borrower defaults on a loan, the risk for the lender is often only the difference between the value of the home and the amount outstanding on the loan, less the amount it costs them to foreclose and resell the property. For this reason, lenders are very wary of lending more than a certain percentage of a homes value. Traditionally, this has been 80 percent. The cushion this provides the lender helps ensure that their losses from loan defaults are kept to a minimum. In recent years, however, it has become increasingly more common to see home buyers using down payments of 10, 5 or even 0 percent. Naturally, loaning this much presents the lenders with a lot more risk. To offset this risk, these transactions often require Private Mortgage Insurance or PMI. This supplemental policy protects the lender in case a borrower defaults on the loan, and the value of the house is lower than the loan balance. PMI has been a large money-maker for the mortgage lenders. The amount of the insurance often $40-$50 per month for a $100,000 house is commonly rolled into the mortgage payment. Given the size of the overall payment, this additional fee is often overlooked. Homeowners continue to pay the PMI even after their loan balance has dropped below the original 80 percent threshold. This occurs naturally, of course, as the home owner pays down the principal on the loan. On a typical 30-year loan, however, it can take many years to reach that point. Until recently lenders were under no obligation to tell home owners when they had reached a point where the PMI can be dropped. That all changed in 1999, when the Homeowners Protection Act took effect. In most cases, this law now obligates lenders to terminate the PMI when the principal balance of the loan reaches 78 percent of the original loan amount. Savvy homeowners can get off the hook a little earlier. The law stipulates that, upon request of the home owner, the PMI must be dropped when the principal amount reaches only 80 percent! It is important to note that this law only applies to home loans whether first time or refinances that closed after July, 1999. Also certain other conditions must be met, such as being current on the loan payments. Buyers that purchased before July 1999 can also have their PMI removed, but they must initiate the process and though the lender is under no obligation to do so, most will. Of course, there is another way that home owners equity can reach beyond the 80/20 percent ratio. Many areas of the United States have seen significant gains in the value of real estate over the past decade. In fact, certain areas have seen appreciation levels of 100 percent or more. Even those people living in areas with more modest gains may find that the value of their property has quickly grown to the point where the amount of principal they owe on their loan is less than 80 percent of the homes current value. Again, in these cases, the lenders are under no legal obligation to remove the PMI. In most cases, however, as long as the home owner has been prompt on their loan payments and dont represent an exceptional risk, the lenders will agree to remove the extra fees. The hardest thing for most home owners to know is just when does their home equity rise above this magical 20 percent point? A certified, licensed real estate appraiser can certainly help. It is an appraisers job to know the market dynamics of their area. They know when property values have risen or declined. Many appraisers offer specific services to help customers find the value of their homes and remove PMI payments. Faced with this data, the mortgage company will most often eliminate the PMI with little trouble. The savings from dropping the PMI pays for the appraisal in a matter of months. At which time, the home owner can enjoy the savings from that point on. Are you on the front lines against mortgage fraud? Mortgage fraud has made headlines locally and nationally. Most of the time, mortgage fraud involves identity theft or fraud — making a borrower appear to be somebody else, with a better job, more income or fewer debts. Somebody more creditworthy. But some mortgage fraud involves a broker or loan officer telling the mortgagee — the lender — and the borrower that the house is worth more than it is. This way, they can close a larger loan and make a bigger commission. Since real estate agents also usually make a percentage of the sale as commission, sometimes they can be involved. In reality, most loan officers, mortgage brokers and real estate salespeople are ethical and would never think of engaging in mortgage fraud. But mortgage fraud of this type always originates with one of the parties who makes a commission on a closed sale. Sometimes, fraud like this can be accomplished without an appraiser involved. Honest, professional appraisal reports are simply altered, or honest, professional appraisers' signatures forged. But in reality, a complicitous appraiser often makes it easier to perpetrate mortgage fraud. At the same time, appraisers are also homeowners', lenders' and the economy's best defense against mortgage fraud. Appraisers are paid a set fee for their work whether a deal is closed or not. Appraisers are hired by and work for the lender that is considering loaning the money to buy a house. That lender is interested in an objective, third party, professional opinion of the true value of the home. The lender needs to know that if the borrower defaults, the collateral used to secure the loan — the house — is valuable enough to cover their loss. Appraisers do not work for individual, commissioned loan officers, mortgage brokers or real estate agents. If they did, there would be too much pressure to "make the deal work," rather than arrive at a professional, considered opinion of the market value of the property. Appraisers also do not work for borrowers, at least in the context of a mortgage loan. But borrowers work closely with mortgage brokers, loan officers and real estate agents, and benefit the most from a third party, objective valuation of the home they want to buy. If something catastrophic happens, such as a job loss, illness, divorce or death, and a borrower can no longer make payments on the home they've mortgaged, they will need to be able to sell the home for enough money to cover the balance of their mortgage. So, nobody benefits more from an appraiser's professional opinion of value on a home than the new homeowner, even though there is no direct client relationship. Like some mortgage brokers, loan officers and real estate salespeople, some appraisers are "bad apples" and will agree to go along with a scheme to defraud lenders and homebuyers so bigger commissions can be had. Not us, and not the vast majority of appraisers. Again, the appraiser is paid a set fee whether the loan closes or not, and does not work for any of the commissioned parties to the transaction. Appraisers are therefore a homeowner's, and a lender's, best front line defense against mortgage fraud. |
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