Question 1

What is an appraisal?

Accepted Answer

An appraisal is a credible opinion of value based on accepted valuation methods and techniques. This opinion or estimate is found through a formal method that generally utilizes the three main "common approaches to value". The most common approach to valuing a house is the Sales Comparison Approach, which involves making comparisons to similar and competing home sales. The Sales Comparison Approach tends to be the most accurate and best indicator of value for a property, given that the valuation is based on pertinent market activity of comparable home sales. The Cost Approach is another process that appraisers use to find value, which considers the cost of improvements, entrepreneurial profit, depreciation, and the land value.  The third approach is the Income Approach, which is the best method in appraising income producing properties; it deals with estimating what an investor would pay based on the money generated by the property.

Question 2

Why would I need an appraisal?

Accepted Answer

Anybody can have an opinion of what a property is worth, and that in itself is often the source of contention.  Real estate appraisers operate in a highly regulated space where credibility is paramount.  When you hire an appraiser, you are paying for a professionally licensed practitioner of real estate valuation to produce an unbiassed, well-constructed report that stands on its own as a credible valuation.

You may need an appraisal when:
Settling a Divorce - to split real estate assets fairly
Settling an Estate (Probate) - to aid in valuing the whole estate, and to establish a new basis for inheritance & taxation
Engaged in Private Sale of Property - to establish an unbiassed fair market value based on current market conditions
Contesting Property Tax Assessment - if you believe your Tax Assessor is overtaxing you based on an incorrect value of your home
Engaged in Litigation - if you require expert witness testimony to quantify market value or damages related to your case
Determining As-Is & As-Repaired Value - typically tailored to investors engaged in renovating an improving a property
Facing Condemnation / Eminent Domain - you are entitled to "Just Compensation" for your property
Home Loans - purchasing, refinancing, HELOC (home equity line of credit), removing PMI (private mortgage insurance)

Question 3

How are appraisers certified?

Accepted Answer

Appraisers are certified by state regulators that are recognized by the federal government. In the United States, the Appraisal Qualifications Board (AQB) sets the minimum education, experience, and examination requirements for state-certified and licensed appraisers.

To become certified, an appraiser must typically meet the following qualifications:
Education:      Appraisers must have completed a certain number of hours of real estate appraisal coursework 
Experience:      Appraisers must have a certain amount of experience in the field, usually a minimum of two years working as a trainee under the supervision of a certified appraiser.
Examination:      Appraisers must pass a rigorous examination that tests their knowledge of appraisal principles, methods, and ethics.

Once an appraiser meets these qualifications, they must apply for certification through the appropriate state agency or professional organization. Appraisers are also required to complete continuing education to maintain their certification and keep up with changing laws and regulations.

Question 4

How can I be assured the appraised value is valid?

Accepted Answer

There are several factors that provide assurance that an appraised value is valid.

First, appraisals are performed by licensed and certified professionals who have undergone extensive training and education in real estate appraisal principles and methods. Appraisers must also follow strict professional standards, guidelines and laws. They are also held accountable by regulatory bodies.

Second, appraisals are based on a thorough analysis of comparable properties, which are similar to the subject property in terms of location, size, condition, and features. The appraiser will also consider market conditions and trends, and will use a variety of methods to estimate the value of the property.

Third, an appraisal is a form of expert opinion and is based on the appraiser's professional judgment and experience. The appraiser will also use his or her knowledge of the local market, and will take into consideration any factors that may influence the value of the property.

Finally, many lending institutions and other users of appraisals will review the appraiser's report and may require additional appraisals or evaluations to ensure the validity of the value.

It is important to note that, despite these measures, no appraisal is completely accurate or free from errors or mistakes. However, an appraisal that is properly prepared and meets the standards of the profession provides a reasonable estimate of the market value of a property.

Question 5

What should I expect when having my home appraised?

Accepted Answer

First contact with the appraiser will begin with a conversation about what the appraisal is for.  Specific details are identified to establish the scope of work, intended use, intended user, relevant dates, and type of value sought.  If you have made improvements or changes to the property since you have acquired it, this would be a great time to share the details with the appraiser.  An engagement letter will then be drafted, outlining the terms of the service.  From there, we can schedule an inspection of the property.

On the day of inspection, the appraiser will need access to the exterior and interior of the property.  Some home owners prefer to meet the appraiser on site, others may choose to store a key in a lockbox and provide the code to the appraiser.  However you choose to go about it, please make sure all areas are accessible in and around the property at the time of inspection.

After inspection, the appraiser will develop a report that synthesizes the available data pertaining to the property being appraised, placing it within the context of relevant market data.  A number of analyses may be performed to produce a credible valuation, depending on the client's needs.  Explanations are written in a way that should be understandable by the intended user of the report.

Once all of the necessary due diligence has been conducted and the appraisal report is completed and signed, it is then electronically transmitted to the client who ordered the appraisal.  Upon delivery, the appraisal is considered complete and payment for the agreed upon fee becomes non-refundable.  Appraisal reports are confidential, and rules governing appraisal practice permit the appraiser to only discuss confidential information and assignment results to the client or those specifically authorized by the client.

It should be noted, in mortgage financing transactions, it is typically the lender who orders the appraisal and is therefore listed as the client and intended user, not the borrower or party who pays for the appraisal.  Borrowers are welcomed to request a copy of the appraisal report from their lender and discuss any questions they have about the appraisal report with them.

Question 6

What is the difference between a home inspection and an appraisal?

Accepted Answer

A home inspection and an appraisal inspection both involve an examination of a property, but they have different purposes and focus on different aspects of the property.

A home inspection is typically performed by a licensed inspector and focuses on the condition of the property's systems and components. The inspector will examine the property's structure, electrical and plumbing systems, heating and cooling systems, and other major components, looking for defects or issues that may need to be addressed. The inspector will also check for compliance with local building codes and safety standards. The main purpose of a home inspection is to identify any potential problems with the property, so that the buyer can make an informed decision about whether to purchase the property and at what price.

An appraisal inspection is performed by a licensed appraiser and focuses on the property's value. The extent of observations are limited to what a typical visitor would see, and are not focused on testing or discovering defects that are not otherwise apparent. The appraiser will look at the property itself, as well as comparable sales in the area, to determine the market value of the property. The appraiser will take into account factors such as the property's location, size, condition, and features, as well as market conditions and trends. The main purpose of an appraisal inspection is to provide an estimate of the property's value, which is used to help determine the amount of a mortgage loan, to settle an estate, or for other legal or financial purposes.

Question 7

What is the difference between a Comparative Market Analysis (CMA) and an appraisal?

Accepted Answer

Realtors have a vested interest in closing transactions at the highest possible dollar amount, as their income is proportionally tied to the final sales price, whereas appraisers operate independently without incentive to improperly value the real estate.

A CMA is typically prepared by a real estate agent or broker to help a property owner determine the market value of their property. It is a marketing tool used to help determine a fair price for a property that is for sale. A CMA looks at comparable properties that have recently sold in the area, and takes into account factors such as location, size, condition, and features of the property. The analysis is based on data from public records and is less formal than an appraisal.

An appraisal, on the other hand, is performed by a licensed appraiser in compliance with regulatory requirements and oversight. An appraisal is a more formal and detailed process and is based on a more extensive analysis of comparable properties, including data from public records, as well as the appraiser's own observations and analysis of the property. Appraisals are frequently requested by lenders to determine the value of a property to serve as collateral for a loan, or in legal matters such as those involving the IRS or courts, when a credible and impartial estimate of value is needed.

Question 8

Removing Property Mortgage Insurance (PMI)

Accepted Answer

If you have a conventional loan and your down payment was less than 20%, you’re probably paying for private mortgage insurance. PMI is a type of insurance that protects your mortgage lender in the event that you default on your loan repayments.

While you pay for PMI each month, it doesn’t benefit you in any way — aside from allowing a smaller down payment when you first bought your home. But as you steadily pay down your mortgage balance and build equity, you’ll have several paths to remove PMI for good.

Your mortgage lender must automatically cancel PMI for free when your mortgage balance reaches 78% loan to value (LTV). In other words, once you’ve paid 22% of your mortgage, your lender is required by law to terminate PMI, but this must be initiated at your request and substantiated by a valid appraisal.

PMI should automatically terminate once you reach the midpoint of your amortization. So, for a 30-year loan, the midway point is 15 years. Keep in mind that you’ll need to have a history of on-time payments and not missed any mortgage payments whatsoever to be eligible.

Please note, these rules only apply to removing PMI from conventional loans. The rules for government-backed loans, most notably the FHA loan, are quite different. Removing mortgage insurance premiums (MIP) from an FHA loan typically involves refinancing into an entirely new loan. But that’s not necessarily the case for getting rid of PMI from a conventional mortgage.

Question 9

Who owns the appraisal?

Accepted Answer

An appraisal report is usually considered the property of the person or entity who commissioned it, also known as the client. The client is typically the person or organization who orders the appraisal and provides the appraiser with the necessary information and instructions to conduct the appraisal. The client is also the intended user of the report, and the appraiser prepares the report specifically for their use.

In the case of real estate transactions, the lender is usually the client, and the report is used to determine the value of the property for the purpose of making a loan. The lender is also the intended user of the report and the borrower will typically pay for and receive a copy of the report, but the lender owns the report.

When a homeowner engages an appraiser directly, the homeowner is the client who specifies how the appraisal can be used, such as for PMI removal, estate planning or tax challenges, for example.

Question 10

Who do appraisers work for?

Accepted Answer

Appraisers typically work for a variety of clients, including:

Lenders: Banks, mortgage companies, and other lending institutions often require an appraisal when a property is being sold or refinanced. This is to ensure that the property being used as collateral for the loan has a value that is equal to or greater than the loan amount.

Government agencies: Federal, state, and local government agencies may also require appraisals for a variety of purposes, such as property tax assessments, eminent domain proceedings, or environmental impact studies.

Real estate agents and Brokers: They can work for real estate agents and brokers to help determine the market value of a property that is for sale, as well as to assist in determining the price to list a property.

Individuals: Appraisers also work for private individuals, such as homeowners, investors, or developers, who need an estimate of the value of a property for personal or business purposes.

Corporations: Appraisers also work for corporations, such as insurance companies, and may be hired to appraise properties for insurance purposes, or to estimate the value of properties for estate planning or other business purposes.

Appraisers are typically independent contractors and may work as employees of an appraisal firm, or they may be self-employed. Some appraisers also work as consultants and may be hired by other professionals, such as attorneys or accountants, to provide expert testimony in court or arbitration proceedings.

Question 11

Which home renovations add the most value?

Accepted Answer

The home renovations that add the most value vary depending on the specific property and the local real estate market. However, some general renovations that tend to add significant value to a home include:

Kitchen remodels: Upgrading the kitchen is often considered one of the best ways to add value to a home. This can include new cabinets, countertops, flooring, and appliances.
Bathroom remodels: Similar to kitchen remodels, upgrading bathrooms can add value to a home. This can include new fixtures, tile, and lighting.
Adding an addition such as a bedroom or bathroom: Adding an addition to include a bedroom or bathroom can increase the overall square footage and functionality of a home, making it more attractive to potential buyers.
Finishing a basement: Finishing a basement can also add living space and value to a home. This can include creating a recreational room, additional bedrooms, or a home office.
Landscaping: Improving the curb appeal of a home by adding landscaping, planting trees or flowers, and maintaining the lawn can also enhance the appeal and value of a home.
Energy-efficient upgrades: Making energy-efficient upgrades to a home, such as installing solar panels, new windows, or a new HVAC system, can also add value, as they can reduce energy costs and make the home more environmentally      friendly.

It's worth noting that the value added by home renovations can vary depending on the location, type of renovation, and the quality of the work, and it's important to consider the cost of the renovation and the potential return on investment. According to one national survey, kitchen remodels returned an average of 88% of the investment. In other words, a $20,000 kitchen remodeling project would add approximately $17,600 to the value of the home. Bathrooms were second, returning 85%. Also, certain upgrades might be more desirable in certain areas, and it's recommended to check what are the most common upgrades in the area and what are the best options for your property.

Frequently asked questions