|
An appraisal of real estate is the valuation of the rights of
ownership. The appraiser must define the rights he intends to appraise.
The appraiser does not create value, the appraiser interprets
the market to arrive at a value estimate. As the appraiser compiles
data pertinent to a report, consideration must be given to the site and
amenities as well as the physical condition of the property. An
appraiser may spend only a short time inspecting the property, however,
this is only the beginning. Considerable research and collection of general and specific
data must be accomplished before the appraiser can arrive at a final
opinion of value. Due to the many types of value, such as Fair Market Value,
Insurance Value, Tax Value and Value In Use, the need to precisely
define the purpose of the appraisal is essential.
Appraisal Methods
An appraisal is an opinion of value or the act or process of
estimating value. This opinion or estimate is derived by using three
common approaches, all derived from the market. They are: - Cost Approach
to value is what it would cost to replace or reproduce the improvements
as of the date of the appraisal, less the Physical Deterioration, the
Functional Obsolescence and the Economic Obsolescence. The remainder is
added to the Land Value.
- Comparison Approach
to value makes use of other "bench mark" properties of similar size,
quality and location that have been recently sold. A comparison is made
to the subject property.
- Income Approach
to value is of primary importance in ascertaining the value of income
producing properties and has little weight in residential type
properties. This approach provides an objective estimate of what a
prudent investor would pay based upon the net income the property
produces.
Then, after thorough analysis of all general and specific data
gathered from the market, a final estimate or opinion of value is
correlated.
Why should appraisals be ordered?
To settle an estate:
Taxing
authorities such as the IRS often require appraisals to establish the
value of an estate when a death occurs. Generally, the survivors want a
conservative value estimate that limits their tax liability as much as
possible. Most estate appraisals are ordered by attorneys, not by the
survivors. To establish the replacement cost for insurance:
Appraisals
obtained for establishing the loss risk in case of fire are often
limited to providing an estimate of the replacement or reproduction
cost of the improvements. The insurable value may not be representative
of market value and usually does not include the value of the land.
Insurance agents may order appraisals when their standard cost service
manuals are not adaptable to an atypical home or structure. Or property
owners may order appraisals to contest the annual appreciation
increases mandated by some insurance companies, especially when the
increase in the insurance coverage results in an unrealistic Premium. To establish just compensation for condemnation:
The appraiser may represent either the landowner or the condemning
authority. Usually, the government entity that needs the land for
public use orders an appraisal and offers to purchase the land for the
value indicated by the appraisal. If the landowner feels that the
amount offered by the condemning authority is not enough, then the
landowner may also order an appraisal. If the parties cannot agree on a
price, then the matter will be settled in court with each appraiser
testifying on behalf of their respective value estimates. The
appraisers are not advocates for their client; they are expert
witnesses trying to support their value estimates.
Often landowners do not consider ordering another appraisal from an
appraiser of their choice. Usually, they try to settle with the
authority by negotiation rather than incur the expense of an appraisal.
It is obvious that the landowner's negotiating position would be
enhanced if a supporting professional appraisal report were available. To contest high property taxes
If
property owners feel that their property is assessed too high, then
they may order an appraisal from a qualified appraiser to contest the
assessment. In certain parts of the country this practice is common,
but many property owners are not aware that this avenue of reducing
their tax burden is available. The return on investment is easy to
perceive when the cost of an appraisal is compared to several years of
lower taxes. Sometimes these assignments include an appearance in front
of the equalization board to argue the landowner's case. The appraiser,
however, must be careful not to base the appraisal fee on the dollar
amount of the appraised value, which could be a violation of the USPAP.
When to Order an Appraisal
There are many reasons to obtain an appraisal. The most common
reason is for Real Estate and Mortgage Transactions, but we have
compiled a list of other reasons you may need to order an appraisal: - to obtain a loan.
- to lower your tax burden.
- to establish the replacement cost of insurance.
- to contest high property taxes.
- to settle an estate.
- to help you make one of the largest financial decisions in your life.
- to provide a negotiating tool when purchasing real estate.
- to determine a reasonable price when selling real estate.
- to protect your rights in a condemnation case.
- to allow you to obtain a qualified appraisal report.
- because a government agency such as the IRS requires it.
- you are involved in a lawsuit.
Home's Market Value
In the real world, very few individuals order appraisal reports to
establish an offering price or to substantiate a purchase price. At the
point that an offer to purchase (in a typical residential transaction)
is made, the price has been set by other parties, not the purchaser.
The price has been determined by the seller, who wishes to obtain the
highest price possible, or the agent, who receives a percentage of the
price as compensation and often represents the seller in the
transaction.
The real estate agent will typically perform 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. The agent will
suggest a selling price to the seller based upon the analysis. However,
neither the seller nor the agent are bound by the results of the
analysis, and the agent is not required to follow any formal procedure
in completing the CMA. If a seller wishes to list the property at a
price higher than the price suggested by the agent, then the agent may
be forced to accept the listing at that price or risk losing a
commission.
Purchasers believe that they are getting a good deal if they make an
offer lower than the listed price. But how far above the market value
was the property listed? 10%, 15%, maybe even 20% above the fair market
value? A negotiated price of 10% less than the listed price on a
property that was listed at 20% above its value is not a bargain. The
agent cannot tell the purchaser that the offered price is higher than
the value, or even higher than their own CMA. In most states, they must
submit the offer to the seller.
The seller of a property may want to order an appraisal before
listing the property. Of course, the cost of the appraisal is always a
deterrent, especially if the seller knows that a buyer will pay for it
when applying for a loan. But the appraisal is often justified. The
seller could lose a sale if the property appraised for less than the
sale price when appraised by the appraiser.
Appraisal To Obtain Loan
Usually, individuals applying for a loan are only interested in
obtaining the loan and unfortunately are not worried about the prudence
of buying the property at the agreed price. In fact, many purchasers
will try to encourage appraisers to increase the appraised value so
that they can purchase the home regardless of its value.
The majority of real estate appraisals are requested by mortgage
companies to validate the property's purchase price for loan purposes.
Except for periods of very low interest rates when everyone is
refinancing, most loans are for the purchase of real estate and ordered
after a sale price is negotiated. Purchasers mistakenly assume that
mortgage companies are looking after their interests in the purchase
transaction.
The law states that if the mortgage company orders the appraisal,
the appraiser is responsible only to the mortgage company. We expect
mortgage companies to be prudent and they should be, but being prudent
is protecting their interest, not necessarily the purchaser's. The
mortgage company's position:
- It has two sources of repayment: the purchaser's income and the property.
- The responsibility to repay the loan is not based upon the
property's value, so the purchaser is obligated to pay the note even if
the property value declines to zero.
- The loan may be insured or guaranteed by a government agency.
- The government does not promise to pay the purchaser's debt if the property value is wrong.
- If the loan is greater than 80% of the value, a portion of the loan may be insured by a private mortgage insurer.
- There is no decrease in risk for the purchaser regardless of
the loan-to-value ratio. The investment by the purchaser is the same, a
mixture of personal cash and a loan that must be repaid.
Helping the Appraiser
Once you have selected an appraiser, be prepared to answer questions and provide requested information.
- What is the purpose of the appraisal?
- When is the required completion date 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 property, such as appliances, are included ?
- If it is an incomeproducing property, provide a breakdown of
income and expenses for the last year or two and a copy of leases.
- 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.].
|
