Regarding Real Estate Appraisal
The Importance Of A Professional Real Estate
minutes to several hours, depending
upon the size and complexity
Because much private, corporate, and public wealth lies in real
estate, the determination of its value is essential to the economic
well-being of society. It is the job of the professional appraiser
to determine these values by gathering, analyzing, and applying
information pertinent to a property.
Unquestionably, the professional opinion of the appraiser, backed
by extensive training and knowledge, influences the decisions of
people who own, manage, sell, purchase, invest in, and lend money on
the security of real estate. And because the appraiser is trained to
be an impartial third party in the lending process, this
professional serves as a vital "check in the system,"
protecting real estate buyers from overpaying for property as well
as lenders from over lending to buyers.
Many states require all real estate appraisers to be, at a
minimum, state licensed or state certified and have fulfilled
rigorous education and experience requirements and must adhere to
strict industry standards and a professional code of ethics as
promulgated by the Appraisal Foundation.
How long does an appraisal take?
The physical inspection of the real property being appraised can
take from approximately
After the initial inspection of the property the appraiser spends
time touring through the neighborhood or area. The purpose of this
tour is to search for comparable sales (other properties that are
similar to the property being appraised) that have sold within the
last year or so. When the field work is finished, the appraiser
completes the report at his office. The report can consist of a
short form report (typically under ten pages) to a long narrative
report which can sometimes exceed a hundred pages. A short form
report usually takes between three to six hours to complete. A
narrative report can take weeks or sometimes even months, depending
upon the complexity of the assignment.
Appraisal VS. Engineer or Whole House
The appraiser is not a whole house inspector, engineer,
architect, electrician, plumber, H.V.A.C. technician or contractor.
The appraiser briefly walks through the house to get an idea of the
general condition and room count. An appraisal is not a guarantee of
condition. The appraiser will ask about any visible problems and
those which may not be visible, and will do his/her best to gauge
any impact on value attributable to those problems. You are
encouraged to seek the advice of experts if you have any questions
about the structural or mechanical aspects
Short form "2055" Vs. "URAR
Fannie Mae" Form Appraisal Report
A "Fannie Mae" - URAR form report has many items
required by the secondary mortgage lending market, that are not
needed in a simple report to find the market value. Both primarily
rely on a direct sales comparison or market approach with a
comparison grid (see below) to determine the market value of the
subject property. The lenders report has many additional arbitrary
requirements which have little bearing on the value found by a
report needed for many other purposes. The traditional
"lender" reports need census tract & SMSA
information for tracking lending patterns. Some lender reports
require a lot of the appraisers effort to determine and substantiate
how much additional rental income is available to support a higher
mortgage. In addition, a great deal of detail is required to help
the lender determine what if any, necessary repairs might be needed
before the property meets their underwriting requirements. All of
these things and much more, may be quite important for a lender, but
probably are useless for most people, who just want to know what a
property is worth for a variety of reasons. Our short form reports
are particularly well suited for helping a seller to price a home
for sale, helping a buyer to decide how much to offer or pay for a
home, for estate tax, gift tax, tax grievance, uncontested divorce
& most any other potential use other than for obtaining a
mortgage or in litigation where the report will be used in
conjunction with expert testimony.
In our complex society, you may need and use the services of a
professional real estate appraiser for a variety of reasons.
Depending upon an appraiser's designation and qualifications, he or
she can provide some or all of these services: Appraisals -
Residential or Commercial; Counseling and Consulting; Evaluations;
Expert Witness Testimony; Litigation Preparation; Feasibility
Studies; Market Analysis; Market Rent & Trend Studies; Tax
Assessment Review and Advice or Zoning Testimony.
Know Your rights in the appraisal process!
Under the Equal Credit Opportunity Act, your lender must provide
you with a copy of the appraisal report upon your written request.
If you are dissatisfied with any information contained in your
appraisal report, you should contact your lender immediately.
The following Items, if available, will help
your appraiser to provide a more accurate appraisal in a shorter
period of time.
A survey of the house and property; A deed or title report
showing the legal description; a recent tax bill; a list of personal
property to be sold with the house if applicable; a copy of the
original plans & specifications, The date and purchase price you
paid when you purchased the property; a list of recent improvements
& cost as well as any other information you feel may be
The Appraisal Process
The appraisal process is an orderly and concise method of
reaching an estimate of value. The process has six major steps which
include: definition of the problem, preliminary survey and appraisal
plan, data collection and analysis, application of the three
approaches to value, reconciliation of value indications, final
estimate of defined value. This process assists the appraiser in
reaching a sound conclusion. The major phase of this process
involves the application of the three approaches to value which
include the Market Data Approach, the Cost Approach and Income
Approach. The three approaches are reconciled and the value via most
applicable approach, in the opinion of the appraiser, is selected as
the final estimate of value. In most residential appraisals,
those of single or two family dwellings, the direct sales comparison
or market approach best reflects the actions of buyers and sellers
and is the most convincing and defendable approach to value.
The market or direct sales comparison approach
The market or direct sales comparison approach to an estimate of
value is a process of comparing market data, that is, prices paid
for similar properties, prices asked by owners, and offers made by
prospective purchasers or tenants willing to buy or lease. Typically
a comparison grid is used and adjustments are made to each of the
comparable sales used for major differences between the comparable
and the subject property for such items as location, gross living or
building area, lot size, condition/effective age, market conditions,
degree of remodeling, construction quality and significant
Jacuzzi, in ground pool, garage, deck,
patio, porch and central air conditioning etc. In the market
approach, the appraiser attempts to both gauge and reflect the
anticipated reaction by a typical purchaser to the subject property.
A comparable sale is a property, that is similar to the subject
property in most respects, is located in a similar (nearby)
location, and has sold recently at arms length. The selection of
comparable sales is in most residential appraisals, the single most
important determining factor in establishing value. It is the
appraisers responsibility to adequately research the local real
estate market and determine which comparable sales best represent
the value characteristics of the subject property.
Arms length transaction
An arms length transaction is one in which both seller and
purchaser act completely independently of each other and have no
connection or relationship to each other.
Market value or fair market value is the most probable price that
a property should bring (will sell for) in a competitive and open
market under all conditions requisite to a fair sale, the buyer and
seller, each acting prudently, knowledgeably and assuming the price
is not affected by undue stimulus. Implicit in this definition is
the consummation of a sale as of a specified date and the passing of
title from seller to buyer under conditions whereby: (1) buyer and
seller are typically motivated; (2) both parties are well informed
or well advised; (3) a reasonable time is allowed for exposure to
the open market; (4) payment is made in terms of cash in U.S.
dollars or in terms of financial arrangements comparable thereto;
and (5) the price represents the normal consideration for the
property sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
The cost approach to value The cost
approach combines an estimate of land value with an estimate of
depreciated reproduction or replacement cost of the improvements.
The principle of substitution is the basis of the cost approach, in
that no rational person will pay more for a property than the amount
for which he can obtain, by purchase of a site and construction of a
building, with undue delay, a property of equal desirability and
The income approach to value
The income approach is based on an estimate of net income from
the operation of an income producing property and the selection of
the property capitalization rate from market indications of similar
properties. The principle of anticipation is the basis of the income
approach and affirms that value is created by the expectation of
benefits to be derived from possession, operation and/or capital
gain at resale.
Highest & best use
Typically, highest & best use means the use or utilization
that provides the most profitable return on investment. It is that
use, selected from reasonably probable and legal alternative uses,
which are found to be physically possible, appropriately supported
and financially feasible to result in the highest possible land
Uniform Standards of
Appraisal Standards Board (ASB)
The ASB sets forth the rules for developing an appraisal and
reporting its results. In addition, it promotes the use,
understanding and enforcement of the Uniform Standards of
Professional Appraisal Practice (USPAP).
FIRREA requires that real estate appraisals used in conjunction with
federally-related transactions be performed in accordance with USPAP.
More than 80,000 state certified and licensed appraisers are
currently required to adhere to USPAP. USPAP contains the recognized
standards of practice for real estate, personal property and
The authority of USPAP extends beyond FIRREA. Since 1992, the Office
of Management and Budget (OMB) has required federal land acquisition
and direct lending agencies to use appraisals in conformance with
1st America Real Estate Services
Marion, Illinois 62959
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Mail (618) 923-3629
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