Submitted by:  Spencer R. Clark, First Tri-County Appraisals

A REALTOR's understanding of the appraisal process is crucial. An appraisal is an estimate of the fair market value of a parcel of real estate; it is based on credible, verifiable facts. A considerable amount of research is required in appraising real estate. The appraiser relies heavily on information included in Trend’s multi-list service, especially for the sales (comparables) of homes that have sold recently that will be used in the appraisal. The more detailed information a Realtor can provide in Trend’s multi-list service on properties that have listed and sold, the more confident the appraiser can be in arriving at the best possible estimate of the fair market value of the subject being appraised. This is vital for both the Realtor and lender and helps to facilitate the appraisal process.

The professional real estate appraiser is an impartial, unbiased party to a real estate transaction. Unlike attorneys and Realtors who are advocates for their clients, an appraiser must remain independent. He or she must perform appraisals in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). These Standards are promulgated by The Appraisal Standards Board of The Appraisal Foundation. The purpose of these Standards is to promote and preserve the public trust inherent in professional appraisal practice.

 

As of January 1, 2008, the requirements to become an appraiser changed. Currently, a trainee interested in becoming a residential appraiser must fulfill the following: (1) complete 200 credit hours in courses directly related to real estate appraising; (2) possess an associate’s degree or have 21 credit hours of course work in subjects approved by The Appraisal Qualifications Board of The Appraisal Foundation; (3) a trainee must amass 2,500 hours of supervised work experience in not less than a 24 month period; (4) finally, a trainee who has fulfilled the course work and supervised work experience must pass a national exam.

The purchase of a home for most people is the largest investment they will make in their lifetime. Many parties are involved in this complex financial transaction, including the buyer and seller, the Realtors, the title company or an attorney, the lender and the appraiser.

 

The appraisal is an objective, independent and unbiased estimate of what a buyer might expect to pay – or a seller receives – for a parcel or real estate. In the purchase of real estate, the buyer and seller must be informed parties. The licensed, certified, professional appraiser is best suited to provide the most accurate estimate of the property’s fair market value keeping the parties of the transaction informed.

 

How does the appraiser begin the appraisal process? The inspection of the property is the first step the appraiser takes to begin his or her appraisal assignment. The appraiser inspects the property being appraised to determine the true status of that property. The inspection can be of the exterior only or it could include an interior and exterior inspection, depending on the lender’s requirements. The appraiser will determine the number of bedrooms, bathrooms, and other rooms. Oftentimes, the inspection includes a sketch of the floor plan and requires measurements of the property to determine the square footage. The appraiser evaluates any features and/or defects of the property and their affect on the value of the home. He or she will also take photographs of the property. In addition, an exterior inspection and photographs of homes that have sold recently that will be used in the appraisal will also be part of the appraisal process. Once the inspection is complete, the appraiser is ready to apply the different approaches available to value the property.

 

There are three approaches to arrive at a value of the property: (1) the sales comparison approach, (2) the cost approach, and (3) the income approach, which is used on rental properties.

 

The sales comparison approach is typically the best indicator of value of a property being appraised. The appraiser usually selects three homes that are comparable to the subject that have sold recently to compare to the subject being appraised. He or she then makes adjustments for dissimilarities between the comparable sales and the subject to come up with an adjusted value of each comparable sale.

 

The cost approach takes into consideration local building costs, labor rates and other factors to determine how much it would cost to build a similar property to the one being appraised. In addition, the appraiser will determine any depreciation of the property. The cost approach often establishes the upper limit of the value of the property.

 

The income approach is utilized in appraisals of rental properties. The income the property generates is used to arrive at the current value of those revenues over the foreseeable future.

 

Once the appraiser has performed all the relevant approaches to value, he or she is ready to choose a value that best represents the fair market value of the subject. This value may or may not actually be the same as the sales price of the home; however, a lender will usually rely on the appraised fair market value to decide how much to loan for the property.