Residential Real Estate Appraisals
Real Estate Appraisals are sometimes difficult to perform. It takes much experience gained by extensive study and on the job training to enable one to appraise correctly.
There are many kinds of Values…Some are listed below:
1. Tax Value, usually lower than Market Value so property owners don’t storm City and County Halls with objections. Although most Tax Assessments are supposed to reflect 100% of Market Value, they are usually a considerable amount lower than the property would actually bring on the Market.
2. Insurance Value, usually higher than Market Value so owners won’t be under insured.
3. Quick Sale Value, usually much lower than Market Value as normally the property is sold in a hurry with no contingencies, in “as is” condition.
4. Intrinsic Value is value believed by owner based on their own preference and circumstances. Usually higher than Market Value. Almost everyone thinks their property is worth more than it will bring on the Market.
5. Fair Market Value. A value based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the Real Estate market.
Fair Market Value is ascertained by a licensed Appraiser through the use of three methods.
(1) By using Comparable Sales with appropriate adjustments applied for differences;
(2) Income Approach to Value based on Market Income vs. Investment Cost and Debt Load; and
(3) Cost Approach, which is the replacement cost of the improvements, with depreciation applied for age, condition and outside influences, plus land value. More or less weight may be given to each approach to value by Appraiser based on his or her knowledge of contributing or non contributing factors.
Appraisals on Real Estate for financing is normally required by the Lending Institutions to determine that the loan doesn’t exceed the value. A loan is considered to be a safe loan when the loan doesn’t exceed 80% of the value. Private Mortgage Insurance to protect the lending institution may be required if the loan exceeds 80% of the value.
Tax Values are sometimes used by Lending Institutions if the loan to value ratio is low.
There is a vast difference between an Appraisal and a Comparative Market Analysis. (CMA)
Comparative Market Analysis’ are usually performed by Real Estate Agents who use only the sales comparison method to determine a range of value for the purpose of pricing the property correctly on the Market. Appraisals are much more complete and may only be performed by a State Licensed Real Estate Appraiser. Normally, Real Estate Agents don’t charge for CMA’S but perform them for owners in hopes of getting listings. Appraisers charge for their Appraisals and instead
of a range of value, they determine a specific value.
Generally if two Appraisers come within 5% of each other on the value reported, both may be considered correct, as Real Estate Appraising is not an exact science.
Broker Price Opinions (BPOs) are usually performed by Real Estate Agents and many get paid a nominal fee by the Lending Institution or Relocation Company that hired them. BPO’s are similar to Comparative Market Analysis and not nearly as accurate as Appraisals.
Wise Executors or Administrators of Estates get at least one if not more Appraisals, before selling the Real Estate in the Estate. It is a good policy to ascertain the Fair Market Value before any sale, in order to be covered legally in case of any objections to the value by any of the heirs.
Appraisers should be chosen based on their experience and expertise in the area where the property is located.
Appraisals are no better than the Appraiser performing the Appraisals, just as one’s Insurance is no better than one’s Insurance Agent.
The cost of an Appraisal is usually based on the difficulty of the assignment.
One should chose their Appraiser carefully, get a price up front for their services, and expect a detailed printed report with photos of the subject property and comparable sales, and one that lines up with USPAP Rules and Guidelines.
The time one might expect for an Appraisal to be completed is going to vary with the work load of the Appraiser and the difficulty of the assignment. Generally Appraisers can get an Appraisal completed within 3 days or less.
Drive by Appraisals are notoriously incorrect as the Appraiser doesn’t view the inside of the Improvements and has no way of knowing condition, quality, etc..
A few dollars spent for an accurate Appraisal can mean thousands of dollars to a seller and the saving of much of the time it takes to market the property.
Overpriced properties set on the market for months unsold. Underpriced properties are sold quickly, but for less than their value. In addition, it is helpful to present the Appraisal to buyers to prove the property is worth the asking price.