Appraisal Frequently Asked Questions

This text is provided by The Appraisal Foundation in a publication titled “A Guide to Understanding a Residential Appraisal”. Click here for full publication

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.
Federal banking regulations require the financial institution to be the client, regardless of who pays the fee.

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.

The issue isn’t so much “distance” or “how far is too far,” rather the question that should be asked, “Is an appraiser from outside of my area competent to appraise my property?” Some appraisers work in many geographic areas and range in which they normally appraise and they may not have the data or the experience to be competent outside their local market.

The more information the appraiser has bout your property, the better he or she will be able to develop a credible result. They 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. He or she might ask if the property is under a pending purchase and sales agreement or option and, if so, the details about the agreement or option. 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 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 the lender’s agent is required to engage the appraiser).

Based on the client’s intended use of the appraisal, the appraiser determines whether an interior and/ or exterior inspection or no inspection 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 consider the site’s size, shape, topography, drainage, and any other attributes that may affect value. He or she views the site improvements (e.g. , paving, fences, and walls, landscaping) to determine their contribution of value to the property. Finally, the appraiser inspects any structures. Some of the items considered are building style, number or stories, size, number or rooms (including bedrooms and baths, etc). He or she observes the structure’s condition as an aid to estimation depreciation. In addition, the appraiser considers the property as a whole, including the dwelling and any other improvements as well as any 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.

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 market.

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 indicated an adjusted sale price for the property being appraised.

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.

· 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
First, write a letter or email to the lender describing the problem and provide any 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’s been submitted.

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, he or she will complete a sales comparison approach and provide his or her own opinion of the value.