FAQ's
What Is An Appraisal?
An appraisal is the development of the Opinion of Market Value for real estate / real property. As an appraiser, we are governed by standards such as USPAP (Uniformed Standards of Professional Appraisal Practice). Appraisals based on this standard have specific rules that dictate how the development and reporting process is completed. “USPAP requires that an appraiser develop and communicate their analyses, opinions, and conclusions to intended users of their services in a manner that is meaningful and not misleading. The appraiser’s responsibility is to protect the overall public trust and it is the importance of the role of the appraiser that places ethical obligations on those who serve in this capacity. USPAP reflects the current standards of the appraisal profession.” (USPAP 2020-2021 Edition)
The Inspection
What goes into a real estate appraisal inspection? In most appraisals completed the inspection of the subject property is the basis on which an appraisal report is completed. The inspection allows the appraiser to determine that overall condition of the property that is the subject of the appraisal. In my process of completing an inspection the exterior of the property, porches, attached or detached garages, outbuildings, etc. are measured to obtain the foot print of the home and determined the gross living area. Keep in mind that not all appraisal assignments require measurements but it is always good practice that the improvements are measured. Once the measuring is completed, the basic room layout is documented on the sketch. The next step of the inspection process is to document and photograph the interior and exterior of the home to obtain the finishes (i.e. shingle or metal roof, stucco or vinyl siding, vinyl flooring or tile flooring, wood cabinets or Formica cabinets, etc.). During the documentation process the appraiser should be determining the construction quality of the home as well as the condition of the home. As an appraiser, we are looking for any and all items that can affect the value and marketability of the property. Keep in mind as a home owner it is always a good idea to tidy up your home, have the lights on, have the interior doors open, makes sure all areas of the home / improvements are assessable, and the lights are on.
Once the inspection is completed, an appraiser will start the developing and reporting of the appraisal process. The appraiser process is comprised of utilizing three approaches to determining the value of real property: a sales comparison, a cost approach, and in the case of a rental property, an income approach.
Sales Comparison Approach
The Sales Comparison Approach is simply the process of researching “comparable sales” from a given market area. The most accurate way to accomplish this process is to take the information obtained from the site inspection of the home and determine the parameters necessary to complete the research of the sales that have closed in a defined market area. This research should take into account site size of the subject property, the location, view, construction quality, design, age, condition, room count, bedroom count, bathroom count, gross living area, the functional utility of the floor plan, and the salient features of the home (i.e. porches, patios, decks, garages or carports, swimming pools, etc.). The selection of the sales to be utilized should be taken from within this set of parameters that bracket all of the aforementioned features of the subject property. The idea behind the Sales Comparison Approach is to locate sales that are similar to the subject property, slightly superior to the subject property, and sales that are inferior to the subject property. Once that task is completed, adjustments are allocated to these sales based on as much factual data can be obtained, local knowledge, and input from realtors in the market also have an impact on the strength of those adjustments. Some markets are known to put a higher emphasis on the various salient features of a home which will result in adjustments being larger or smaller than others. On average an appraiser is making somewhere in the range of 700 different decisions in the course writing of the first two of pages in a standard appraisal report.
Cost Approach
The cost approach is the easiest to understand. The cost approach is an indication of value based on the premise that a buyer would not pay more for a property than the cost to construct a property of equal utility. The appraiser uses information on local building costs, labor rates and other factors to determine this cost. The cost approach is not necessarily the best indication of market value for many properties, but is often applicable for new(er) or proposed construction and special use properties. The appraiser should be utilizing a one or several services available in determining the cost to construct the subject improvements (i.e. Marshall and Swift Residential Cost Handbook, www.Dwellingcost,com, etc. or several others. ).
Income Approach
The Income approach is the research of similar homes in the market area that are owned and rented to people for the purpose of generating income. The approach to value aids investors in determine the monthly rent that con be obtained from the property. The Income Approach also aids the appraiser in determining the gross rent multiplier which is the conversion of the monthly rent into the value of the property.
Reconciliation
The reconciliation of the three approaches is the compilation of all of the general and specific data obtained from the inspection, research, and analysis of the subject property and market area. Combining information from all of the approaches, is the last step for the appraiser to provide an estimated market value for the subject property and to lead the reader of the report as to why this value was reported.