Appraisal

Appraisal is a document that gives an estimate of a property's fair market value. An appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The appraisal is performed by an "appraiser" who is typically a licensed individual trained to render expert opinions concerning property values. In an appraisal, consideration is given to the property, its location, amenities as well as its physical conditions.

Why get an Appraisal ?

The most common reason for ordering an appraisal is to obtain a loan on a property. However, there are several other reasons why an appraisal might be needed. Below are just a few:

• To establish the replacement cost (insurance purposes).
• To contest high property taxes.
• To settle a divorce.
• To settle an estate.
• To use as a negotiation tool (in real estate transactions).
• To determine a reasonable price when selling real estate.
• To protect your rights in an eminent domain case.
• Because a government agency requires it.
• Lawsuit.

What are Appraisal Methods?

Appraisers use three common approaches when establishing the value of a given property:

1. Cost Approach:  In this approach, the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
2. Sales Comparison Approach:  In this approach, the appraiser identifies 3-4 comparable properties in the neighborhood which have recently been sold. Ideally, the properties are close in vicinity (within a 1/2 mile radius of the subject property) and have sold within the last six months. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
3. Income Approach:  In this approach, the potential net income of the property is capitalized to arrive at a property value. This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream into a present value is known as capitalization.

After thorough exercise of the three approaches, a final estimate or opinion of value is correlated. When evaluating single-family, owner-occupied properties, the sales comparison approach is most heavily weighted by an appraiser.

Who owns the Appraisal?

Even though the borrower pays for the appraisal, the mortgage company owns it. This is because the mortgage company orders the appraisal on the borrower's behalf, and the appraiser lists that mortgage company on the appraisal report. However, the borrower has the right to receive a copy. It is at the mortgage company's discretion whether or not to give the borrower the original appraisal.

Assisting your Appraiser

In order for the appraiser to perform his/her job properly, there might be requirements for additional information. Some information that may be requested is as follows:

• What is the purpose of the appraisal?
• Is property listed for sale and if so, for how much and with whom?
• Is there a mortgage? If so, with whom, when placed, for how much, type of mortgage, interest rate, and any other types of financing.
• What personal properties, such as appliances, are included in the property?
• If it is an income-producing property, a breakdown of income and expenses for the last year or two and a copy of lease might be required.