What is an appraisal?:
A home purchase is the largest, single investment most people will ever make. Whether it’s a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.
Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid. This is where the appraisal comes in.
An appraisal is an unbiased estimate of what a buyer might expect to pay – or a seller receive – for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser’s duty is to inspect the property being appraised to ascertain the true status of that property. The appraiser must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features – or defects – that would affect the value of the house.
Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ”comparable” to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.
In the case of income producing properties – rental houses for example – the appraiser may use a third approach (Income Approach) to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ”bidding wars” that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money that the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.
Why would someone require services from Appraisals for Land and Homes?
There are a lot of reasons to purchase an appraisal with the usual reason being real estate and mortgage transactions. Other reasons for getting an report include:
- Purchasing a home?
- Home Equity loans for repairs and remodels
- Refinancing to reduce your interest rate
- Tax Appeal
- PMI removal
- Estate Planning, Liquidation or Divorce
- To determine a reasonable listing price when selling your home.
- To ensure parties are provided just compensation in eminient domain cases.
There are many reasons for the need of an appraisal, this is not an inclusive list. If you need more information regarding the appraisal process and want to speak to one of our expert appraisers, click here.
Is an appraisal the same as a home inspection?
Appraisers do not do provide house inspections and are not home inspectors. An inspection is a third-party evaluation of the available structure and appliances of a property, from the top to the bottom. Generally, a home inspection report will evaluate the amenities and the necessities of the house: air conditioning, electrical services, the condition of the heating system, the plumbing; then the structural integrity of the home such as the attic, exposed insulation, walls, floors, ceilings, windows, then the foundation, basement and visible structures.
My agent performed a CMA for me. Is that the same as an appraisal?
To be blunt, it’s apples and oranges. The CMA utilizes market trends to generate most of their business. The appraisal is reliant on similar valid comparable sales. The appraisal report will also include location and building costs. All a CMA does is generate a “ball park figure.” An appraisal delivers a defensible and carefully documented opinion of value.
Who’s behind the report is actually the biggest difference between a CMA and an appraisal. Real estate agents, who may not have a complete understanding of valuation methods or the entire market, write CMA’s. A certified, state licensed professional who has formed a career on valuing homes in and around North Georgia is behind the appraisal. Likewise, the agent has a vested interest in the property’s selling price whereas the appraiser is bound by a code of ethics to accept a flat sum for work they perform, regardless of their value conclusion.
What’s in an appraisal report?
Every appraisal should reflect a credible estimate of value and should identify the following:
- The client and other intended users.
- How the appraisal is supposed to be used.
- The purpose of the appraisal.
- Precisely what “value” attribute is being reported and what that value means.
- The effective date of the appraisal.(Sometimes this is in the past or maybe the future for new construction)
- Relevant property attributes, including: location, physical description, legal attributes, economic factors, the real property interest valued, and non-real estate items included in the valuation, such as personal property, permanent equipment installations and even intangible factors.
- 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.
- What was entailed in the process of completing the assignment.
Once the appraisal is done, what guarantee is there that the value conclusion is trustworthy?
In the documentation of an appraisal, each appraiser must see to it that each of the items below are covered:
- The appraisal used analysis of the information.
- That crucial errors of omission or commission were not committed individually or collectively.
- That appraisal services were not conducted in a careless or negligent fashion
- That a credible, defensible appraisal report was communicated.
There are intense education and real world experience requirements that must be fulfilled in order to get an appraisal license in Georgia. In addition, appraisers must follow a stringent industry code of ethics and respect national standards of practice for real estate appraisal. The guidelines for developing an appraisal and communicating its results are guaranteed by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP). You can read and learn more about USPAP by clicking here.
Regulations regarding licensing and certification are different from state to state. In general, licensing and certification is most often associated with many hours of classroom study, tests and real world experience. Once an appraiser is licensed, he or she is required to engage in continuing education courses in order to keep the license up to date. To see the specific requirements for any state click here.
Where does Appraisals for Land and Homes get the data used to estimate values in North Georgia?
Gathering information is one of the primary functions of an appraiser. Data can be classified as either Specific or General. Specific data is collected from the property itself; Location, condition, amenities, size and other specifics are documented by the appraiser during an inspection.
General data is gathered from a numerous sources. To research recently sold homes to be used as “comps”, an appraiser will often go to the local Multiple Listing Service. Tax records and other courthouse documents verify actual sales prices in a market. Flood zone data is gathered from FEMA data outlets, Census, and local statistics provided by the county development authority and Chamber of Commerce.
And most importantly, the appraiser gathers general data from his or her collective knowledge gained from creating appraisals for other houses in the same market.
Why should I hire a licensed appraiser?
If you’re making any kind of financial decision and the value of your home is relevant, you’ll want a full appraisal. For those selling a home, you’ll want to figure out a price that gets you the most profit but also ensures you don’t have to wait too long for a buyer to show up; an appraisal can help with that. If you’re buying, it makes sure you don’t overpay. For people settling an estate or divorce, an appraisal from Appraisal for Land and Homes is the best documentation to ensure assets are divided properly. Simply put, a house is often the single, largest financial asset anybody owns. Knowing its true value means you can make informed financial decisions.
What exactly is PMI and how can I get rid of it?
PMI stands for Private Mortgage Insurance. PMI takes care of the lender in the event a borrower is unable to pay on the loan and the value of the property is less than what the borrower still owes on the loan. You can have your PMI dropped once you’ve achieved 20% equity in your home through appreciation and principal payments.
Has your real estate appreciated since you first purchased? Contact Appraisals for Land and Homes today! You may be able to cancel your Private Mortgage Insurance payment.
Should I do anything in advance of the appraisal inspection?
We start with an inspection of the property. During this process, we 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. Inside, make sure it is clutter free and that we can find our way to things like furnaces and water heaters. On the outside, trim any bushes so we can be free to get an accurate measurement of exterior walls.
To help expedite our work as well as ensure a more accurate report, try if possible to have the following items:
- A list of any major home improvements and enhancements, the date of their installation and their cost (for example, the addition of Energy efficiency upgrades or roof repairs) and permit confirmation (if available).
- Any records on the purchase of the property for the last three years.
- Any inspection reports, or other recent reports for termites, EIFS (synthetic stucco) wall systems, septic systems and your well.
What is “Market Value?”
In real estate appraising, Market Value (as opposed to Fair Market Value) is commonly defined as:
“The most probable price (in terms of money) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and 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: the buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and 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 has rights to the appraisal report?
For mortgage transactions, the lender orders the appraisal, either directly or through a third party. Even though it’s the buyer that eventually pays for the report, the lender is the intended user. The buyer is certainly entitled to a copy of the appraisal – it’s usually bundled with all the other closing documents – but is not entitled to use the report for any other purpose without permission from the lender.
This rule doesn’t apply when a home owner hires an appraiser directly. In these scenarios, the appraiser may define the purpose of the appraisal; for PMI removal, or estate planning or tax challenges, for example. If not noted otherwise, the home owner can use the appraisal for any purpose.
I want to get more for my house. Where should I spend money renovating?
It really depends on the market. For example, adding a central air conditioner in to a home in the South may add significant value, while putting one in a home near the Pacific Northwest might not have much impact.
No matter where you go, however, renovating a kitchen is almost always a safe move. 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 are right up there with kitchens, returning 85%. Adding bedrooms and baths can also help the value of your home as long as your home doesn’t then become atypical for your neighborhood in terms of size.