Appraisal Basics Study Notes

Chapter One: The Practice of Appraisal

  • Importance of Appraisal
      - The appraisal report plays a critical role in the buying and selling process of homes.
      - It can potentially impact the deal between buyers, sellers, and lenders.

Definition of Appraisal

  • What is an Appraisal?
      - An appraisal is an impartial qualified appraiser's opinion of the value of a specific property as of a specific date.
      - Supported by relevant market information.
      - It is an opinion because value can be subjective, and qualified appraisers may provide different valuations for the same property.
      - Appraisals are educated, data-driven approaches to determine market value.

Key Differences: Appraisal, Valuation, and Evaluation

  • Appraisal
      - An official and unbiased estimate of value based on a property's nature, quality, and utility.
  • Valuation
      - Process of collecting information and developing an opinion of value for a real property.
      - Can be performed by individuals who are not licensed appraisers.
  • Evaluation
      - A statement regarding the utility of property without providing a value estimate.
      - Focuses on the characteristics of property interests.
      - Sets itself apart from appraisal and valuation which concentrate on determining value.

Appraisal Reports

  • Appraisal Report
      - The tangible outcome of an appraisal.
      - Summarizes the property's market value based on data collected.
      - Typically requested by lenders during mortgage origination.
      - Usually paid for by the buyer and the appraiser is chosen by the lender.

Importance of Appraisals in Transactions

  • Appraisals serve important roles for all parties:
      - Sellers: Understand what price they can charge for their property.
      - Buyers: Ensure they are making a fair investment.
      - Lenders: Confirm they are not lending more than the property's worth, providing assurance for their investment.

Appraiser Selection

  • Lenders are responsible for choosing appraisers to maintain impartiality.
      - It is illegal for lenders to be affiliated with appraisers to avoid conflicts of interest.

Types of Properties and Situations for Appraisal

  • Appraisals can be conducted on various property types, including:
      - Single-family homes
      - Apartment buildings
      - Condominiums
      - Offices
      - Shopping centers
      - Farms and commercial buildings
  • Situations requiring appraisals include:
      - Real estate sales
      - Mortgage lending (notably for government-backed loans)
      - Setting rental rates for leased properties
      - Property insurance valuation
      - Tax assessment appeals

Importance of Appraised Value for Lenders

  • Collateral:
      - Property serves as collateral for mortgage loans, and lenders need to assess its value to ensure their investment is protected.
      - A borrower's creditworthiness must also be considered alongside the property's appraised value in lending decisions.

Loan to Value Ratio (LTV)

  • Lenders maintain a Loan to Value ratio to prevent lending more than a property's worth.
  • LTV is expressed as a percentage of the property's appraised value or sales price.
  • If a borrower defaults, the bank wants to avoid being left with a depreciated asset.

Who Can Perform Appraisals?

  • Only certified real estate appraisers can perform appraisals, not merely real estate agents.

Role of Appraiser

  • A real estate appraiser must:
      - Provide impartial, unbiased information to estimate market value.
      - Exhibit strong analytical skills and the ability to assess market trends.
      - Be licensed or certified to conduct appraisals.

Regulation of Appraisers

  • The profession of appraisal has become well-regulated following national financial failures attributed to overvaluation by appraisers.
      - The Appraisal Foundation established in 1987 certifies appraisers and mandates adherence to national standards.
      - Compliance with USPAP, the Uniform Standards of Professional Appraisal Practice, is necessary for ethical practice.

Requirements to Become an Appraiser

  1. Fulfill educational requirements specific to the desired license.
  2. Accumulate required appraisal experience.
  3. Pass a written exam.
  4. Maintain continuing education and fulfill renewal requirements.

The Appraisal Process: Steps

  • The appraisal process breaks down into eight key steps:
  1. State the Objective
      - Clearly define the purpose, property, and timelines of the appraisal.
  2. List Necessary Data and Sources
      - Identify the data needed for analysis and collection methods.
  3. Gather, Record, and Verify Data
      - Collect and validate data about the property and local market conditions.
  4. Determine the Highest and Best Use
      - Assess the most profitable legal use of the property utilizing collected data.
  5. Estimate the Land Value
      - Evaluate the value of land separately and compare it to similar parcels.
  6. Estimate Value Using Applicable Approaches
      - Apply appropriate valuation methods based on property characteristics.
  7. Reconcile the Final Value Estimate
      - Combine data from different approaches while giving weight to the most relevant.
  8. Complete and Present the Value Report
      - Finalize and present the appraisal report following USPAP standards.

Recap of the Appraisal Process:

  • The eight steps are reiterated for clarity, emphasizing professionalism and adherence to both standards and the detailed analysis process.

Underwriting Processes Following an Appraisal

  • Appraisals are sent to lenders for review and underwriting.
      - An underwriter may request an appraisal review to confirm accuracy.
  • Reviews can be either desk reviews or field reviews depending on the complexity and risk of the loan.

Preparing for an Appraisal as a Listing Agent

  • Strategies to ensure a property meets appraisal standards include:
      - Meeting with the appraiser on-site.
      - Providing comparable properties to help justify pricing.
      - Building rapport with the appraiser to positively influence the appraisal process.

Conclusion

  • Understanding appraisals is crucial in real estate transactions as it directly affects both the buyers' investments and sellers' profitability.
  • Proper preparation, knowledge, and adherence to standards will facilitate accurate and fair appraisals for all parties involved.