An appraisal of real estate is a dollar amount valuation, technically of the rights of ownership. The appraiser must define the rights he intends to appraise. The appraiser does not create value, the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning.
Considerable research and collection of general and specific data must be accomplished before the appraiser can arrive at a final opinion of value.
Due to the many types of value, such as fair market value, insurance value, tax value and value in use, the need to precisely define the purpose of the appraisal is essential.
Why Would I need 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.
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.
How are appraisals made?
Three common approaches, all derived from the market,make up your appraisal:
- The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the physical deterioration, the functional obsolescence and the economic obsolescence. The remainder is added to the land value.
- The comparison approach to determining value makes use of other "benchmark" properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property.
- The income approach to determining value is of primary importance in ascertaining the value of income producing properties and has little weight in residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.
Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated.
What can I do to make my appraisal go smoother?
Select an appraiser with a reputation for the type of appraisal you need. The job is all about experience! For example: Our affiliated appraisers must meet our positive feedback standards to stay affiliated. Once you have selected an appraiser, be prepared to answer questions and provide requested information such as:
- What is the purpose of the appraisal?
- When is the required completion date of the appraisal?
- Is the property listed for sale and if so, for how much and with whom?
- Is there a mortgage? If so, with whom, when was it placed, for how much, type of mortgage [FHA, VA etc.], interest rate, and are there any other types of financing.
- What personal property, such as appliances, are included ?
- If it is an income producing property, a breakdown of income and expenses for the last year or two and a copy of leases.
- A copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.
- A copy of current real estate tax bill, statement of special assessments, balance owing and on what [sewer, water, etc.].
For a list of affilates go to the Service Directory .
