Appraisal Basics | Reasons To Order An Appraisal

There are many reasons to obtain an appraisal. The most common reason is for a real estate or mortgage transaction, but we have compiled a list of other reasons you may need to order an appraisal. Remember if you would like to order an appraisal for any reason, go to www.ArrowAppraisalsinc.com and click on order.

To Settle an Estate
Taxing authorities such as the IRS often require appraisals to establish the value of an estate when a death occurs. Generally, the survivors want a conservative value estimate that limits their tax liability as much as possible. Most estate appraisals are ordered by attorneys, not by the survivors.

To Establish the Replacement Cost for Insurance
Appraisals obtained for establishing the loss risk in case of fire are often limited to providing an estimate of the replacement or reproduction cost of the improvements. The insurable value may not be representative of market value and usually does not include the value of the land. Insurance agents may order appraisals when their standard cost service manuals are not adaptable to an atypical home or structure. Property owners may order appraisals to contest the annual appreciation increases mandated by some insurance companies, especially when the increase in the insurance coverage results in an unrealistic premium.

To Establish Just Compensation for Condemnation
The appraiser may represent either the landowner or the condemning authority. Usually, the government entity that needs the land for public use orders an appraisal and offers to purchase the land for the value indicated by the appraisal. If the landowner feels that the amount offered by the condemning authority is not enough, then the landowner may also order an appraisal. If the parties cannot agree on a price, then the matter will be settled in court with each appraiser testifying on behalf of their respective value estimates. The appraisers are not advocates for their client; they are expert witnesses trying to support their value estimates. Often landowners do not consider ordering another appraisal from an appraiser of their choice. Usually, they try to settle with the authority by negotiation rather than incur the expense of an appraisal. It is obvious that the landowner's negotiating position would be enhanced if a supporting professional appraisal report were available.

To Contest High Property Taxes
If property owners feel that their property is assessed too high, then they may order an appraisal from a qualified appraiser to contest the assessment. In certain parts of the country this practice is common, but many property owners are not aware that this avenue for reducing their tax burden is available. The return on investment is easy to perceive when the cost of an appraisal is compared to several years of lower taxes. Sometimes these assignments include an appearance in front of the equalization board to argue the landowner's case. The appraiser, however, must be careful not to base the appraisal fee on the dollar amount of the appraised value, which could be a violation of the USPAP.

Single Family Appraisal

What You'll See on a Residential Appraisal Report

Appraisals are very detailed reports, but here are a few things they include:

• Details about the subject property, along with side-by-side comparisons of three similar properties.

• An evaluation of the overall real estate market in the area.

• Statements about issues the appraiser feels are harmful to the property's value, such as poor access to the property.

• Notations about seriously flawed characteristics, such as a crumbling foundation.

• An estimate of the average sales time for the property.

• What type of area the home is in (a development, stand alone acreage, etc.).

Residential Appraisal Methods

There are two common appraisal methods used for residential properties:

Sales Comparison Approach

The appraiser estimates a subject property's market value by comparing it to similar properties that have sold in the area. The properties used are called comparables, or comps.

No two properties are exactly alike, so the appraiser must compare the comps to the subject property, making paperwork adjustments to the comps in order to make their features more in-line with the subject property's. The result is a figure that shows what each comp would have sold for if it had the same components as the subject.

Cost Approach

The cost approach is most useful for new properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed.

So What Does the Appraisal Mean to You?

Your personal approval is accomplished early in the loan process, but final loan commitment usually hinges on a satisfactory appraisal. The bank wants to be sure its investment is covered in case you default on the loan.

If the property appraises lower than the sales price, the loan might be declined, but that isn't the only hurdle it must pass. Other facts on the appraisal can be a problem, too:

• The bank probably won't like it if the estimated time to sell the property is longer than the area average.

• If the appraiser notes that entry to the property is from a private, shared road the bank might want to see a road maintenance agreement signed by everyone who uses the road, verifying that maintenance is shared by all parties.

Those are just a few examples of negatives that could stall your purchase. The lender will study the appraisal carefully before determining whether or not the property qualifies to serve as security for your loan.

An Appraisal Isn't a Home Inspection!

Appraisers make notations about obvious problems they see, but they are not home inspectors. They do not test appliances, look at the roof, check the chimney or do any other typical home inspection tasks. Never count on an appraisal to help you determine if the home is in good condition.

THE APPRAISAL PROCESS

Thinking Outside The Grid . . .THAT'S Where the "Magic" Happens!

Appraising is not as easy as finding three comps that look like the subject, making several “rule-of-thumb” adjustments, waving the magic clipboard and saying Whala! Miraculously, the correct value does NOT just appear before your eyes.

The appraisal form is not a magical tool that gives you the right value. Actually, the adjustment process can deceive you into thinking you have found the right value, especially if you start your analysis with the wrong comps.

The job of the residential appraiser, which has become overly focused on “filling out of the form” has caused many appraisers to adopt a form-driven approach to determining value. This is concerning to me because it is limiting the appraiser’s ability to think like the typical buyer in the market. The appraiser’s thought process is becoming too far removed from actual market participant’s. I have never seen a buyer in the market “gridding” comps before making an offer. Why should the appraiser need to “grid” comps to determine roughly what the subject is worth?

Appraisers should refrain from jumping into the analysis section of the report (gridding comparables) prior to having a good “ballpark” ideal of the subject’s value. If an appraiser does not have a “rough” ideal of the subject’s value, then he/she should not be gridding comps or making final decisions on the comparables to include in the report. Residential appraisers can sometimes fall into the trap of choosing and analyzing comparables based on solely Underwriting guidelines. This approach to the appraisal process can result in completely erroneous value conclusions.

Often, the primary cause for an incorrect value conclusion is not realizing the impact of location, which we all know has a major influence on value. Perhaps this is overlooked (especially by newer, less experienced appraisers) because location is somewhat more elusive than a factor like style, age, or bedroom count. The later are easily identifiable from the data. Merely choosing comps that “look” like the subject without adequate consideration of the subject’s location could leave the appraiser completely blindsided. It is quite dangerous to make comparable selections based mainly on overall style similarity without adequate consideration of the subject’s location.

Analysis of the wrong comps with “rule-of-thumb” adjustments and failing to recognize and account for location differences will cause the appraiser to conclude the WRONG value.

Sub Prime Mess!

Runt Rants - Psst! Can we talk?! Sub Prime and Alt-A Part Three

In the first of this series on the Sub Prime and Alt-A meltdown we talked about how individuals could solve a problem between a lender and a borrower when circumstances change and the loan can no longer be retired under the original terms. The damage is minimized, a new arrangement that suits the borrower's ability to pay is agreed upon, and the underlying asset is protected. Problem solved.

Part Two discussed the sub prime market, put it in prospective...a growing but still small part of the US Mortgage portfolio of loans. We pointed out that the products were not new, their performance histories easily tracked, and the future performance could have, should have, and likely was well known. No surprise that we are where we are.

Today's Part Three will focus on the originators of the sub prime and Alt-A portfolios and their very different mindset compared to traditional lenders. We'll also discuss the changes that are occuring in those originator sources, and the impact that has had on creating the problem we have today. We'll present one view of the solution, not the likely solution, but one that should be taken.

Wow. It's been three weeks since my last post, where I promised to wrap up this little series on Sub Prime, Alt-A and whatever else this crisis in progress can include. It ain't gonna happen. Wrap up isn't possible yet. I've been watching, reading, listening, feeling the pulse of the market with my own personal stethoscope and seismometer. Don't know about you, but I'm alternatively overwhelmed and underwhelmed with this one.

I'm overwhelmed with the seismic shock waves that have reverberated from what is in essence an isolated event. It's a disturbing reminder that today's Flat World is truly interconnected. I sneeze, someone in China catches cold. The Countrywide CEO makes a few badly advised and perfectly ill timed remarks in public and liquidity dries up. Small people can effect global business.

A mini panic occureds as a result of everyone in the daisy chain of the last three years realizing they've been stupid. Not had, not hoodwinked, not swindled, but stupid. If there is a tag line for the Summer of 2007 it has to be "Nobody saw this coming!" What a perfect tag line, what a banner headline, what a perfect attempt to pass the blame. What a crock!

Make no mistake about this. Let's be very blunt and clear. Everybody saw this coming. The players with equity stakes...the borrowers, the mortgage brokers, the mortgage lenders, the investment bankers, the hedge funds, the niche investment managers and their invisible but massive capital funds sources....they all saw this coming. They simply chose to look the other way. To hope history would not repeat, at least not on their watch. If history did repeat, they hoped to pass the costs and the losses to others. They were living in the moment, enjoying the inflated revenues of the moment, knowing that those revenues, those profits were excessive, and they hoped someone else, later, not themselves, would pay for their lack of provision for the future.