Why do I need an appraisal? How long does an appraisal take? What qualifications does a real estate appraiser need? Does an appraisal include an engineers report or whole house inspection? What is the difference between a short form report and the more traditional "Fannie Mae" (URAR) Uniform Residential Appraisal Report and other "lender" orientated reports? Can I get a copy of an appraisal a lender ordered on my home? Is there anything I can do to speed up the appraisal process? What constitutes a typical appraisal? What is the market approach? What is a comparable sale? What is an arms length transaction? What is market value? What is the cost approach? What is the income approach? What does highest & best use mean? What rules must appraisers follow?

Why do I need an appraisal?

The professional opinion of the appraiser, backed by extensive knowledge and training, influences the decisions of people who own, manage, purchase, invest in and lend money on the security of real estate.

An appraiser fills the role of being an impartial third party in the lending process, thus protecting real estate buyers from overpaying for property as well as lenders from over lending to buyers.

How long does an appraisal take?

The physical inspection of the real property being appraised can take from approximately 30 minutes to several hours, depending upon the size and complexity involved.

After the initial inspection of the property, the appraiser spends time touring the surrounding area. The purpose of this tour is to search for comparables (other properties that are similar to the property being appraised) that have sold within the last six months to a year. When the fieldwork is finished, the appraiser completes the report at the office. The report can consist of a short form report (typically ten pages) to a long narrative report that 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 complexities of the assignment.

What qualifications does a real estate appraiser need?

States require that all real estate appraisers be state licensed or state certified.  This involves fulfilling rigorous education and experience requirements.  In addition, all appraisers must adhere to strict industry standards and a professional code of ethics set forth by the Appraisal Foundation.

Appraisal vs. Engineer or Whole House Inspection?

The appraiser is not a home inspector, engineer, architect, electrician, plumber 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 problems which many not be visible, and will do his best to gauge any impact on the value that is attributable to those problems.  You are encouraged to seek the advice of an experienced home inspector if you have any questions about the structural or mechanical aspects of the home.

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 necessarily needed in a simple report to determine the market value.  Both primarily rely on a direct sales comparison or market approach with a comparison grid to determine the market value of the subject property.  The lender's report has many additional arbitrary requirements that have little bearing on the value found by a report that serves other purposes.  The traditional "lender" reports include census tract information for tracking lending patterns.  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 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 report is particularly well suited for helping a seller to price a home for sale, helping a buyer decide how much to offer or pay for a home, for estate tax, gift tax and 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.

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 & costs as well as any other information you feel may be pertinent.

The appraisal process

The appraisal process is an orderly and practical 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 and final estimate of defined value. This process assists the appraiser in reaching a valid conclusion. The major phase of this process involves the application of the three approaches to value: the Market Data Approach, the Cost Approach and the Income Approach. The three approaches are reconciled and the value from the most applicable approach, in the opinion of the appraiser, is selected as the final estimate of value. In most residential appraisals, particularly 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 to value

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 comparable for major differences between the comparable and the subject property relating to condition, effective age, market conditions, degree of remodeling, construction and significant amenities such as a fireplace, spa, in ground pool, garage, deck, patio, porch, central air conditioning, etc.  In the market approach, the appraiser attempts to gauge the anticipated reaction of a typical buyer to the subject property.

Comparable sales

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 the most important determining factor in establishing value in most residential appraisals.  It is the appraiser's 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 buyer act completely independently of each other and have no connection or relationship to each other.

The market data approach to value

Market value or fair market value is the most probable price that a property shall bring (will sell for) in a competitive and open market under all conditions required for a fair sale, the buyer and seller each acting prudently, knowledgeably and as such that the price is not affected by any undue stimulus.  Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from a seller to a 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, i.e. 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 utility.

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 suggests the value is created by the expectation of benefits to be derived from possession, operation and or capital gains at resale.

Highest & best use

Typically, highest and best use means the use or utilization that provides the most profitable return on investment.  It is that use, selected from reasonably probable legal alternative uses, which are found to be physically possible, appropriately supported and financially feasible that results in the highest possible land value.

Uniform Standards of Professional Appraisal Practice

The Appraisal Standards Board (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 business appraisals.

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 USPAP.