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Appraisal Guide
What is an Appraisal?
Why get an Appraisal?
What are Appraisal Methods?
Who owns the Appraisal?
Who determines the market value of a property?
Assisting your Appraiser
• What is an Appraisal?
Appraisal is a document that gives an estimate of a property's
fair market value. An appraisal is generally required by a lender before loan
approval to ensure that the mortgage loan amount is not more than the value of
the property. The appraisal is performed by an "appraiser" who is typically a
state-licensed individual trained to render expert opinions concerning property
values. In an appraisal, consideration is given to the property, its location,
amenities as well as its physical conditions.
• Why get an Appraisal?
The most common reason for ordering an appraisal is to obtain a loan on a
property. However, there are several other reasons why an appraisal might be
needed. Below are just a few:
» to establish the replacement cost (insurance purposes).
» to contest high property taxes.
» to settle a divorce.
» to settle an estate.
» to use as a negotiation tool (in real estate transactions).
» to determine a reasonable price when selling real estate.
» to protect your rights in an eminent domain case.
» because a government agency requires it.
» lawsuits.
• What are Appraisal Methods ?
Appraisers use three common approaches when establishing the value of a given
property:
- Cost Approach: In this approach the following formula is
used to arrive at the property value: Value of the land (vacant), added to the
cost to reconstruct the appraised building as new on the date of value, less
accrued depreciation the building suffers in comparison with a new building.
- Sales Comparison Approach: In this approach the appraiser
identifies 3-4 comparable properties in the neighborhood which have recently
been sold. Ideally, the properties are close in vicinity (within a 1/2 mile
radius of the subject property) and have sold within the last six months. The
appraiser then compares the sold properties to the subject property. The
factors used in the comparison include square footage, number of bedrooms and
bathrooms, property age, lot size, view, and property condition.
- Income Approach: In this approach the potential net
income of the property is capitalized to arrive at a property value. This
approach is suited to income-producing properties and is usually used in
conjunction with other valuation methods. The process of converting a future
income stream into a present value is known as capitalization.
After thorough exercise of the three approaches, a final estimate or opinion
of value is correlated. When evaluating single-family, owner-occupied
properties, the sales comparison approach is most heavily weighted by an
appraiser.
• Who owns the Appraisal?
Even though the borrower pays for the appraisal, the mortgage company owns
it. This is because the mortgage company orders the appraisal on the borrower's
behalf, and the appraiser lists that mortgage company on the appraisal report.
However, the borrower has the right to receive a copy. It is at the mortgage
company's discretion whether or not to give the borrower the original appraisal.
• Can I use another mortgage company even after the appraisal has been
completed?
Yes. In most cases, changing your mortgage company does not mean you will
have to pay for another appraisal. The first lender can transfer the appraisal
to your new lender. Some appraisal firms may charge a small fee, however,
because there is clerical work involved in editing the appraisal to reflect the
new mortgage company. This fee is called an "Appraisal Retype Fee." The original
mortgage company has the right to refuse to transfer the appraisal to another
lender. In this event, you will need to get a new appraisal.
• Who determines the market value of a property ?
The seller of the property is the person who sets the price of the property
(specially residential property), and not an appraiser. This is because sellers
normally do not order an appraisal when selling their homes. Sellers wish to
obtain the highest selling price possible for their homes and hence do not want
to be bound by the appraiser's assessment of their home. The real estate agent,
who receives a percentage of the price as compensation and often represents the
seller in the transaction, normally assists the seller in setting the sale
price.
The real estate agent performs 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 and the
surrounding area. Typically, the agent will suggest a selling price to the
seller based upon the analysis. However, the seller may not accept that price
and choose to list the property for a higher price.
• Assisting your Appraiser
In order for the appraiser to perform his/her job properly there might be
requirements for additional information. Some information that may be requested
is as follows:
» What is the purpose of the appraisal?
» Is property listed for sale and if so, for how much and with whom?
» Is there a mortgage? If so, with whom, when placed, for how much, type of
mortgage
[FHA, VA etc.], interest rate, and any other types of financing.
» What personal properties, such as appliances, are included in the
property?
» If it is an income-producing property, a breakdown of income and expenses
for the last
year or two and a copy of lease might be required.
» Provide a copy of deed, survey, purchase agreement or other pertinent
papers
pertaining to the property.
» Provide a copy of current real estate tax bill, statement of special
assessments,
balance owing and on what [sewer, water, etc.].
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