So what is an appraisal and why do I need it?!

These things we call APPRAISALS!

Real estate transactions often require appraisals because they occur infrequently and every property is unique. An appraisal is a written estimate of a property’s market value completed by an appraiser. The value is based upon a market analysis of recent sales prices for similar properties in the area, and the property’s physical condition.

There are three standard approaches to appraisals:

  1. The Cost Approach: estimates what it would cost to replace or reproduce the improvements as of the date of the appraisal, with deductions for issues like physical deterioration. This is added to the land value to determine that value of the property.
  2. The Comparison Approach:  looks at properties of similar size, quality and location that have recently sold in order to derive a comparative value. Variations between the properties are factored into the valuation by adding or subtracting amounts to adjust for things like more bathrooms, a smaller lot, etc.
  3. The Income Approach: is generally used for commercial properties, and is not typically relevant for residential property valuations. The income approach estimates the value of the property based on upon the net income the property produces.

So why do we need an appraisal during a real estate transaction?

  • If you are applying for a loan.
  • If you would like to reduce your property tax obligations.
  • To show the replacement cost of insurance.
  • If you need to settle an estate.
  • To offer you an edge when purchasing real estate.
  • To find a reasonable sales price when selling real estate.
  • Because an official agency such as the IRS requires it.

Lenders use the appraisal to determine the appropriate loan amount. Because home values can vary considerably, even in the same neighborhood, it’s important for the lender to have an objective opinion of the value of a home before making a loan that will be secured by the property.

But what the heck does the appraiser look for?

Typically the appraisal report includes:

  • The client and other intended users.
  • The purpose of the assignment.
  • The type of value reported and the definition of the value reported.
  • The effective date of the appraiser’s opinions and conclusions.
  • Property characteristics, including location attributes, physical attributes, legal attributes, economic attributes, the real property interest valued, and Non real estate items included in the appraisal, such as personal property, including trade fixtures and intangible items.
  • All known: easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, and other items of a similar nature.

NOTE: All parties involved in a Real Estate Transaction are allowed access to the final appraisal.

Certain factors which will affect an appraised value for better or worse could be inside or outside. The appraiser will make a determination of the general condition, appeal, and functionality of the house. Those items taken into considerations are the following:

  • General condition and age of the home
  • Size of home and property
  • Location of the home
  • Features of the home (i.e., 3 bedrooms, 2 baths, etc.)
  • Major structural improvements, such as additions and remodeled rooms
  • Architectural features, such as skylights and fireplaces

What is a CMA?

Although the Appraisal determines the property’s value, home sellers do choose their list price before an appraisal is required. This list price is determined by the REALTOR as it’s market value

But the biggest difference is the person creating the report. A CMA is created by a real estate agent . The appraisal is created by a licensed, certified professional who has made a career out of valuing properties.

So who do the Appraisers work for?

Appraisers are normally employed by lenders to estimate the value of real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters and investment decisions.

The lender hires the appraiser, and the fee for the appraisal will be included in the borrower’s closing costs, and outlined in the Good Faith Estimate. Generally, the lender has a relationship with a third-party firm that specializes in performing appraisals, allowing them to quickly assign a qualified appraiser to evaluate the property.


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