What is an Appraisal?

What is an appraisal service? 

An appraisal is a part of buying and selling real estate. It is an estimation of the value of the property based on several factors, one being the inspection and the surrounding like-properties. Banks and mortgage companies often have their own appraiser, but some will use an outside appraisal service

This is an independent company outside of the bank or mortgage company that provides a real estate valuation service on the properties they are looking to loan money for purchase. They are staffed by experienced and licensed appraisers that do the actual appraisal footwork. 

What is a professional appraisal?

The purpose of an appraisal and the duties of an appraisal service is to make sure the buyer isn’t paying too much for the property. It also protects the bank or mortgage company from lending more money than the property is valued. Basically, an appraisal is the professional appraiser’s opinion of a property is worth the what the bank or mortgage company is going to fund a loan.  

What an appraiser looks for?

An independent appraiser or a staff member for an appraisal service will view the condition and quality of the property, the amenities, and any special features that could affect the value. They review ‘comps’, other properties of similarity in the area that have sold within a certain time frame.  The review of the ‘comps’ property’s value is the crux of the appraisal and determining factor for the lender along with other factors such as these: 

External Considerations: Fannie Mae is a government entity that works with real estate lenders by supply them products and tools that assist in lenders in lending money to home and property buyers. As a government entity, the haves a uniform report that most appraisers and appraisal services use when inspecting a property. 

The appraiser or appraisal service is obligated to inspect the property using the requirements stated on the URAR,( Uniform Residential Appraisal Report), to inspect certain aspects and features of a home. The external considerations include fixed qualities of the property such as: 

  • The structure: foundation, gutter system, parking area, roof, siding, and overall condition. parking area.
  • The age: if the property is a house or other structure, the age. 
  • The location: the neighborhood and surrounding area also has an impact on the home’s value.

Internal Considerations: An independent or appraisal service appraiser will inspect inside the property, with focus on the following: 

  • Square footage of the structure.
  • Functionality of space.
  • Number of bathrooms and bedrooms.
  • The kitchen size and functionality such as appliances.
  • Safety issues including fire escapes, handrails, and code compliance.
  • Structure integrity.
  • Surfaces of interior. 
  • Electrical and plumbing. 

Décor: The actual décor of the property is not any concern to the appraisal service, but the property’s condition and layout. The areas and items that an appraiser is concerned with: 

  • Needed repairs.
  • Soiled carpeting.
  • Cracked plaster. 
  • Cooling and heating. 
  • The property location match the value of asking price. 

Comparison: The appraisal services  most important tool to determine a home’s value is the ‘comps’ aka comparable sales, the prices that similar homes and properties are appraised or sold recently. This will include review the market value as well. 

For example, if similar homes in the area have sold for $100,000 and the asking price of the property is question is $300,000, the appraiser will state the vast differences and recommend the lender decline. The criteria of a loan is based on the type of the load, either government backed or a conventional loan, each having stringent criteria to what they are allowed to lend on a property.

Records: The appraisal service will access the local tax database to verify the rightful owner and assess the following: 

  • Property value on tax roll.
  • Size of lot.
  • Square footage of house or structure.
  • Review in person any addition to property not on tax roll.
  • All structures are code compliant.

Pictures: The independent appraiser or appraisal service agent will take pictures of the surrounding neighborhood and the property/structure from all angles, both exterior and interior and submit those pictures with the appraisal report. The photographs will include any cracks, damage, maintenance issues, the roof, and any defect that can affect the property value.

Upgrades: It is recommended for the buyer and/or seller to be present with the appraiser arrives and offer the finer points and highlights of the property, especially those that may not be immediate visible and appreciated. Items like a new water heater or HVAC unit, bath, and kitchen improvements like new plumbing fixture, recently replaced toilet with low-flow, and other improvements that justify the asking price.  

How is property valued appraised?

After the appraisal service agent or independent appraiser complete the above described steps, they use a valuation method to assign the property a final value. There are two methods used for this, some appraisers will use one or the other, some appraisal services will use both. The goal is to reach as accurate of a number as possible.

How are appraisals calculated?

Sales Comparison 

This is the more common used method and is based on the fair market value of the property when compared to like-properties in the same area that have sold usually within the last 90 days. 

Cost Method

The cost method will calculate the cost to replace the house or structure in its entirety based on the cost of local construction labor and materials. With the following steps, the appraiser or appraisal service can calculate the rebuild cost, starting at the ground and completing: 

  • The lot value.
  • The cost of reproduction exact house or structure. 
  • The age and condition of the house or structure and the calculated depreciation.
  • Subtract the calculated depreciation from the replacement cost.
  • Consider and add any external improvements like deck, landscaping, pool, spa, or storage shed.
  • Add the lot value to the depreciated figure and improvement value total, getting an accurate replacement amount.  

How accurate are home appraisals?

We have to remember that nobody is perfect, including independent appraisers and agents of appraisal services. Any appraisal can be accurate or faulty. An appraisal can be affected by the area around the house or property, for example, if a house is in a subdivision, there are recent sales that make the appraising process easier. 

However, a home where other properties may not be nearby or they vary from size and style, and nobody moves off, it can be more difficult to appraise the house or property. The good news is that 92% of all appraisals are near or right on the money, therefore funding the loan isn’t held up based on the report from the independent or appraisal service. 

How do you know if an appraisal is good?

As the buyer, you want the appraisal service to come back with a value of the property more than you’ve offered to pay. This give you immediate home equity. However, if the appraisal service agent comes back with a value lower than what you’re willing to pay, it will stop the entire loan process.

When that happens, the buyer should review the appraisal report for possible errors that can account for their valuation. The buyer or the real estate agent should review the comps, making sure nothing was overlooked.  If the buyer still want the house or proper in spite the low appraisal, they have two options:

  • Negotiate a lower price with the seller in line with the appraised value.
  • Pay a larger down payment in the amount that covers the difference.

Is a professional appraisal necessary?

There are pros and cons of a professional appraisal service, and there are two distinct sides to the process.  One side, a borrower can benefit from an appraisal as a safeguard they aren’t overpaying for the house or property. It could be considered a consumer protection service. 

Then, with the cost of a standard appraisal, as much as $500, that is an extra expense for the borrower, when chances are money is tight already.  This can actually turn a buyer off from wanting to buy when they start adding up the additional costs they’ll be putting out. 

When buying a house or property, there are several expenses a buyer will be responsible for in addition to the down payment. Most first time buyers aren’t aware of this, this is why many will back out when they start getting “nickeled and dimed” with all these costs.