WHAT IS INVOLVED IN AN APPRAISAL?
Appraisers follow a set of federally accepted guidelines and practices known as USPAP (Uniform Standards of Professional Appraisal Practice), which govern the ethical and legal aspects of the appraisal reporting process.
Your property is first inspected and measured. The quality of construction, age, and “observable” condition of the structures are noted. Any tangible items such as views or privacy are also considered. The appraiser then estimates the property’s “highest and best use.” In the case of a single-family residential property, typically the “highest and best use” is to continue as is.
Once the inspection is completed, the appraiser next begins the estimation of your property’s value by means of one or more of three appraisal approaches:
- The value indicated by recent sales of comparable properties in your neighborhood. (The Sales Comparison Approach)
- The current cost of reproducing or replacing your home, less the estimated depreciation, plus the value of your land. (The Cost Approach)
- The value that your property’s net earning power will support. (The Income Capitalization approach)
The most commonly understood and used of the three approaches to estimating value is the Sales Comparison Approach. In this method, the appraiser will compare your home to recent sales in your neighborhood. These sales are called comparables. Ideally, the appraiser would like to find a home exactly like yours right next door to yours. However, this rarely happens. The appraiser will compare your home to homes that are as similar as possible. Similarities include but are not limited to: square footage, bed/bath count, age, appeal, condition, quality of materials used in construction, and amenities. Where differences occur, the appraiser makes dollar adjustments.
These adjustments are based on the appraiser’s experience with and knowledge of the “market” and what value the “typical buyer” would place on a given amenity. It is not the “cost” of the amenity. After the dollar adjustments are made, the comparables will indicate a value range. This value range is then narrowed to indicate value with the “Sales Comparison Approach” by giving greater weight to the comparable which proves to be the most similar home in terms of its location, amenities and date of sale.
Under the Cost Approach, your property is “built on paper”. The cost to build the structures (less observable depreciation) is determined based on residential cost handbooks and the appraiser’s knowledge of local building codes and labor rates. It is then combined with the land value to estimate the value of the entire property. Land values are obtained by reviewing recent vacant land sales (if available). The cost to construct less depreciation, along with the value of the land, should ideally fall within the value range indicated by neighborhood sales in the Sales Comparison approach.
If applicable, under the Income Capitalization Approach, the income potential of your property is compared to expected returns on similar properties in the area. However, in most single family residential appraisals, the appraiser is allowed to consider but not perform this approach to value as most single family homes are owner occupied not tenant occupied
All this information is compiled and given weight in the appraiser’s Final Reconciliation consideration as to its reliability and accuracy. The most pertinent of this information is summarized in an appraisal report and presented to the “client” in the form of a Final Estimate of Market Value.
The “client” can be a person or an institution. By law, the appraiser can discuss the particulars and outcome of the appraisal with the “client” only. If your bank/mortgage company ordered the appraisal, then they are the “client” and they “own” the appraisal. Under most consumer laws (check with your state for specifics), if you pay for the appraisal, you are entitled to a copy of the appraisal but must ask the bank/mortgage company for the copy. Any questions you have regarding the appraisal itself need to be directed to the bank/mortgage company who will, in turn, contact the appraiser if further clarification is required.