What is the Process of an Appraisal?
1. An appraisal is ordered from a trusted appraisal company.
2. The appraiser contacts the homeowner to set up the appraisal appointment.
The information gathering:
3. The appraiser visits the subject property. At this time, the appraiser measures the home, takes photographs of every room in the home, and makes note of all the characteristics of the subject property. The appraiser will also make note of the subjects lot, location, view, external influences, and any exterior hazards that are visible. The appraiser will make note of positive exterior elements like a lake, a park, a cul-de-sac, wooded view, etc. The appraiser will also drive through the subject property's neighborhood to get an overview of the amenities and characteristics it has to offer.
The comparable selection:
4. After the appraiser has the relevant information on the subject property, he will look through the MLS database for sales that are similar and recent. (This is NOT a database in which the typical property owner has access.) In other words, Zillow does not set appraisal values. Every home has hundreds of characteristics to consider when arriving at a value. There is no comparable that is perfect to any subject property. The comparables are selected because many or some characteristics match that of the subject. There are line item adjustments for any differences between the comparable and the subject property. For example, if the subject is a 1000 square-foot rambler with two bedrooms, one bathroom, and it has a big deck, and the comparable is a 1000 square-foot rambler with two bedrooms, one bathroom, but NO deck, there is a positive adjustment to the comparable's sale price. This is called the Sales Comparison Approach and it primarily the method of accepted valuation.
Definition of the sales comparison approach from Wikipedia.
"The sales comparison approach is based primarily on the principle of substitution. This approach assumes a prudent (or rational) individual will pay no more for a property than it would cost to purchase a comparable substitute property. The approach recognizes that a typical buyer will compare asking prices and seek to purchase the property that meets his or her wants and needs for the lowest cost. In developing the sales comparison approach, the appraiser attempts to interpret and measure the actions of parties involved in the marketplace, including buyers, sellers, and investors.
Data collection methods and valuation process Data is collected on recent sales of properties similar to the subject being valued, called "comparables". Only SOLD properties may be used in an appraisal and determination of a property's value, as they represent amounts actually paid or agreed upon for properties. Sources of comparable data include real estate publications, public records, buyers, sellers, real estate brokers and/or agents, appraisers, etc. However, most lenders will only accept MLS sales data if it is available. Important details of each comparable sale are described in the appraisal report. Since comparable sales aren't identical to the subject property, adjustments may be made for date of sale, location, style, amenities, square footage, site size, etc. The main idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If the comparable is superior to the subject in a factor or aspect, then a downward adjustment is needed for that factor. Likewise, if the comparable is inferior to the subject in an aspect, then an upward adjustment for that aspect is needed. The adjustment is somewhat subjective and relies on the Appraiser's training and experience. From the analysis of the group of adjusted sales prices of the comparable sales, the appraiser selects an indicator of value that is representative of the subject property. It is possible for various appraisers to chose different indicator of value which ultimately will provide different property value. However, if both appraisers are competent, the values should be within a reasonable range.
Steps in the sales comparison approach 1. Research the market to obtain information pertaining to sales, and pending sales that are similar to the subject property. 2. Investigate the market data to determine whether they are factually correct and accurate. 3. Determine relevant units of comparison (e.g., sales price per square foot), and develop a comparative analysis for each. 4. Compare the subject and comparable sales according to the elements of comparison and adjust as appropriate. 5. Reconcile the multiple value indications that result from the adjustment (upward or downward) of the comparable sales into a single value indication."
5. The appraisal report is written and delivered. There are many types of appraisal reports depending on the needs of the client, however most appraisals are The Form 1004, "Uniform Residential Appraisal Report." It is the most commonly used appraisal form. It is designed for single-family and owner occupied two family (not for lending purposes) homes, including those with auxilliary apartments or "in-law, mother/daughter" units. It is extensively used by lenders and other investors for purchases and refinancing purposes. It is also used for formal certiorari tax appeals, condemnation, contested matrimonial or any situation involving a single family dwelling or owner occupied two family dwelling in which court testimony is contemplated.
The appraiser's description of the physical characteristics of the property and comparables will be obtained from reliable data sources.There will be a thorough interior and exterior inspection. The inspections take about half an hour to one hour, depending on the size of the house.
A "Uniform Residential Appraisal Report" typically consists of a letter of transmittal; neighborhood analysis; description of the site; description of the improvements; cost approach; direct sales comparison approach utilizing comparable sales on the comparison grid; reconciliation; definition of market value; certification; contingent & limiting conditions; firrea addendum; interior and exterior photos of the subject property; exterior photos of all comparable sales used; comparable sales location map; sketch of subject property showing room layout; flood map if in print and qualifications of the appraiser and reviewer.