FAQ
- Why is an appraisal necessary?
- The lender orders the appraisal to obtain an accurate description of the property and an independent opinion of value. The lender uses the appraisal to document that the real estate is appropriate collateral and determine whether the value of the property is sufficient to support the lending decision.
- Why isn't the consumer considered to be the client when s/he pays the appraisal fee?
- Federal banking regulations require the financial institution to be the client, regardless of who pays the fee.
- How does the appraiser develop the value opinion?
- The appraiser researches market data, public records and talks with buyers, sellers and real estate brokers active in the market area. Data researched includes sales, leases and current listings of similar properties. Other data include land sales and residential construction costs. After all factors affecting the value are considered, the appraiser develops an opinion of value and prepares an appraisal report.
- I have heard about problems with appraisers traveling long distances to appraise homes. How far is too far?
- The issue isn't so much "distance" or "how far is too far," rather the question that should be asked, "How many appraisals has an appraiser completed in my area?" Some appraisers are experienced in multiple geographic areas. But some may not have the data or the experience to be competent outside their local market.
- What information should I provide to the appraiser?
- The more information the appraiser has about your property, the better s/he will be able to develop a credible result. The appraiser will be interested in knowing if there are any private agreements or restrictions, easements or rights of way, encroachments, "agreed to" arrangements with the abutters (e.g., fences, walls) on the property, etc. The appraiser may ask about the property's title, sales and rental history and occupancy. S/he might ask if the property is under a pending purchase and sales agreement or opinion and, if so, the details about the agreement or opinion. If the property sold in the last three years, the appraiser may ask about the details of the transfers. Finally, the appraiser may inquire about physical characteristics of the property, including any additions, permits, etc. If you are hiring the appraiser directly, the appraiser will want to know what the intended use of the appraisal will be. (NOTE: If you are engaging the appraiser to prepare an appraisal for a federally-related transaction, you should know that the lender or lender's agent is required to engage the appraiser).
- What should the appraiser do when s/he inspects my home?
- Based on the client's intended use of the appraisal, the appraiser determines whether an interior and/or exterior inspection or no inspection is required. Under many circumstances, the lender will require a full viewing of the property including an exterior and interior inspection. Assuming that a complete inspection is required, the appraiser inspects the site, site improvements and building improvements. The appraiser considers the site's size, shape, topography, drainage and any other attributes that may affect value. S/he views the site improvements (e.g., paving, fences and walls, landscaping, etc.) to determine their contribution of value to the property. Finally, the appraiser inspects any structures. Some of the items considered are building style, number of stories, size, number of rooms (including bedrooms and baths, etc.). S/he observes the structure's condition as an aid to estimate depreciation. In addition, the appraiser considers the property as a whole, including dwellings and any other improvements as well as visible encumbrances (e.g., power lines, encroachments). Finally, the appraiser considers the property in relation to the neighborhood. An appraiser's inspection and a home inspection are different. An appraiser gathers information to develop a value opinion and a home inspector gathers information to identify construction features, structural integrity and any needed repairs.
- What is a comparable sale or comparable listing?
- A comparable sale is a recent sale that is similar to the subject property in terms of physical and functional attributes and location. A comparable listing is a current listing that is similar to the subject property in terms of physical and functional comparison approach. In most cases, the sales comparison approach is the most reliable indicator of value for a residential property because it most directly reflects the actions of buyers and sellers in the marketplace.
- Why does an appraiser make "adjustments"?
- In developing an opinion of the value of a property, an appraiser considers recent sales of similar properties. Generally speaking, the sales that are the most similar to the property being appraised are the best indicators of value. However, since rarely are two properties exactly the same, the appraiser must account for differences between the property that sold and the property being appraised. These differences are called "adjustments." Adjustments are added or subtracted from the sale prices of the comparables to indicate an adjusted sale price for the property being appraised.
- In what circumstances would an appraiser use the cost approach and/or sales comparison approach?
- The cost approach is based on the premise that an informed purchaser would pay no more for the subject property than the cost of constructing a substitute property with the same utility. Differences between the sales comparison approach and the cost approach are particularly evident when the property being appraised involves older improvements where depreciation due to age and functional obsolescence are difficult to estimate, or when the improvements are relatively unique or specialized and there are few comparable properties. If completed correctly, under ideal circumstances the indicated value by the cost approach should be similar to the estimated value by the sales comparison approach.
- What elements should a credible appraisal include?
- A clear, accurate description of the subject property
- Sales that are the most recent and most comparable
- Comments that explain important issues in the appraisal
- An opinion of value supported by the analysis of the comparable sales
- What should I do if I believe a correction is needed to the appraisal report?
- First, write a letter or email to the lender describing the problem and provide evidence you have. For example, if the appraisal has an incorrect living area size for the subject property, provide factual evidence which supports your position. If you believe the appraiser selected comparables that were not the most comparable, submit a list of the comparables you would like him or her to consider. The lender will provide this information to the appraiser and request the appraiser to consider what has been submitted.
- After asking for a reconsideration of value, the appraisal remains flawed. What are my options?
- You may request the lender order an appraisal review assignment or to order a second appraisal (keep in mind the lender is not required to do either). An appraisal review is completed by a different appraiser who will verify the facts and data in the appraisal, search for additional comparables and provide a conclusion as to whether the comparables used in the appraisal are the most comparable. If the review appraiser does not agree with the opinion of value in the original appraisal, s/he will complete a sales comparison approach and provide his or her own opinion of the value.