Appraisal Process

What is an Appraisal

A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to complete the process.

Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.

So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.

This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receive - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.


Types of Valuation Approaches
Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.

Cost Approach
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.

Sales Comparison
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

Income Approach
In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Reconciliation
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money that the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.

Preparing for Your Appraisal:

1. Housekeeping: The appraiser does not care if your home is tidy or untidy. However, the lender looks at the interior and exterior pictures of your property. It is important to remove clutter in order to give the underwriters and desk reviewers  the best possible impression of your home.

2. Easy Access: The lender requires the appraiser to inspect all areas of your home. Make sure all rooms are unlocked and accessible. This prevents delays such as the appraiser having to make a second trip out to the property.

3. Renovations: Try to complete any work that is being done to your property (such as adding rooms, wiring, plumbing, etc.) prior to your appraisal inspection. Unfinished construction projects might delay the appraisal process. When setting the appointment, let your appraiser know of any work in progress. 
 
4. Minor Repairs: If needed, it would be a good idea to make minor repairs prior to the appraisal inspection. Damage such as cracked windows, peeling paint, and old water stains cannot be ignored by appraisers and present a red flag to lenders.  These are easy and inexpensive repairs. Your home should appear well maintained.

5. List of Improvements: It is a good idea to present your appraiser with a list of any upgrades or renovations that you have done to your home.  Even minor improvements can add overall value to your property.

6. Documentation: The appraiser needs copies of the permits for any recent additions. The appraiser also needs information regarding Homeowner’s Association (HOA) fees, condominium fees, and/or special assessments.