a guide to understanding a residential appraisal

7/29/2019 A Guide to Understanding a Residential Appraisal

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A Guide to understAndinGA residentiAl ApprAisAl


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An appraisal is an opinion o value. For estate planning, nancial planning, or saleprice decisions, individuals or a trusted advisor usually orders an appraisal. When

an appraisal is used to obtain an opinion o value o a property or loan purposes,

ederal regulation requires the lender or its agent to place an appraisal order. The

lender or its agent contacts a state licensed or certied appraiser and identies the

property to be appraised and the intended use o the appraisal. The appraiser then

determines the appropriate scope o work or the assignment.

The appraisers scope o work typically includes the type o property inspection(interior, exterior only or none), what approaches to value are required, and any

lender-specic requirements. In some cases, the lender may order the appraisal

through an agent, such as an Appraisal Management Company (AMC).

There is no single standard appraisal report orm, ormat, or style. However, or

residential mortgage lending, Fannie Mae (FNMA) and Freddie Mac (FHLMC),

which are Government Sponsored Enterprises (GSEs) that purchase mortgages

on the secondary market, have developed residential appraisal report orms thatare commonly used to communicate the appraisal o properties used as collateral.

Regardless o the type o appraisal report used, all appraisal reports must contain

sucient inormation to enable the intended users to understand the report properly.

the process of

obtAininG the ApprAisAl


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residentiAlApprAisAl

The ApprAisAl process

Ifanappraisalrequiresaninteriorinspection,anappraiserwillcontactthe

homeowner (or, in the case o a sale, an agent or the seller) to inspect the

interior and exterior o a property. As previously mentioned, an appraisal may

not require an interior inspection.

Anappraiserwillresearchcountyandmunicipalrecords,MultipleListing

Service (MLS) records, and other data services or inormation and

documentation concerning the subject property and market area.

Anappraiserwillreviewrecentsalesandlistingsofcomparableproperties.

Comparables are recently sold or listed properties that have similar utility,

quality, age and amenities as the subject property and are located in the subject

propertys market area. In markets where ew sales have recently occurred,

comparables may be rom similar or competing neighborhoods located some

distance rom the subject property.

Anappraisermayusethesales comparison approach to develop an opinion

o value. Oten the primary approach to develop an opinion o value or a

residential property, the sales comparison approach utilizes recent sales ocomparable properties. An appraiser will analyze and compare characteristics

that include the living area o the home, land area, style, age, quality o

construction, number o bedrooms and bathrooms, presence or absence o a

garage, etc.

Thecost approach is another method an appraiser may use to develop an

opinion o value. The cost approach is the appraisers opinion o the current

replacement cost o constructing a reproduction o the existing structure, lessany estimated depreciation, plus the value o the land. The cost approach is a

valuable approach to use when appraising newer homes that might have little or

no depreciation.

Lastly,anappraisermayutilizetheincome approach. The income approach is

most oten used in appraisals o properties that have two, three or our living

units, where income is a actor in the decision-making process o buyers and

sellers. It is generally not used or one-unit residential properties in areas wherethe majority o the homes are owner-occupied.


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Afterdatacollectionandanalysis,theappraiserwilldevelopanopinionof

value by considering the indicated value(s) o the sales comparison approach,

as well as the cost approach and/or income approach, i applicable. The

values indicated by the approaches utilized will be reconciled to a nal opiniono value. The appraiser will present his or her ndings and conclusions in a

report to the lender.


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essenTiAl elemenTs o credible ApprAisAl

Credible appraisals clearly identiy the property appraised, the scope o work

perormed by the appraiser, the client and other intended users, and the intended

use o the report. The appraisal report must include the denition o value

(e.g., market value), the eective date o value, the subject propertys relevant

characteristics, and any other special instructions rom the lender, Fannie Mae,

Freddie Mac, VA, FHA, etc. A credible appraisal must eectively communicate the

data and analysis required to support the opinion o value.

A credible appraisal must comply with the Uniorm Standards o Proessional

Appraisal Practiceand all regulatory requirements including the Federal Fair

Housing Act, ECOA, as well as client-specic requirements.

The imporTAnce o ApprAiser independence

Appraisers are trained to defect any attempt to infuence the appraisal or value

opinion, remaining independent, impartial and objective. The appraiser has

the sole responsibility or the analyses, opinions, and conclusions contained in

the appraisal.

Appraiser independence is a critical element to protect the client and intendedusers and to enhance the public trust that appraisals contain credible opinions o

value. Furthermore, both Federal and State law requires appraiser independence.

Without public trust, mortgage investors could withdraw unds rom the market

resulting in a shortage o unds or residential lending.

WhAT To do i iT is discovered ThAT A correcTion

is necessAry or oTher relevAnT dATA should beconsidered

Ater reviewing your appraisal, i you believe the appraiser did not consider

important inormation about the subject property or available comparables,

discuss the matter with your lender. Submit your concerns in writing to the lender

with a request that the appraiser be asked to address them. The appraiser should

review the appraisal and, i additional credible inormation is pertinent to the

appraisal assignment, provide a revised appraisal with commentary addressing

your concerns.


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WhAT To do i There is rAudulenT or incompeTenT

ApprAisAl prAcTice

I you suspect raudulent or incompetent appraisal practice, submit your concerns

in writing to the lender. Also, you may consider ling a complaint with the stateappraiser regulatory agency in the state in which the property is located. The

contact inormation or each state is available at www.asc.gov. You may also

contact the Financial Fraud Enorcement Task Force at www.stopraud.gov.

Please be advised that state appraiser regulatory agencies will generally not act as

a resource to you in trying to resolve any issues with the appraisal that may aect

your transaction. Instead, the agency will consider your complaint in light o the

appraisers responsibilities under the law, and may take disciplinary action againstthe appraiser, i necessary.


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imporTAnT Terminology

Aaa An opinion o value.

T Aaa at - The Appraisal Foundation is a Congressionally

authorized non-prot organization established in 1987. The Appraisal Foundation

is dedicated to the advancement o the appraisal proession. The Foundation

accomplishes its mission through the work o its three independent boards: the

Appraisal Practices Board (APB), the Appraiser Qualications Board (AQB) and

the Appraisal Standards Board (ASB).

Aaa maat ca Appraisal Management Companies

have contracts with companies (such as lenders) that require appraisal services.

Appraisal Management Companies act as agents to hire the appraiser and

provide other valuation services.

Aaa pat ba (Apb) The APB is charged with the

responsibility o identiying and issuing opinions on recognized valuation

methods and techniques, which may apply to all disciplines within the appraisal

proession. Compliance with guidance issued by the APB is voluntary.

Aaa rw The act or process o developing and communicating an

opinion about the quality o another appraisers work.

Aaa staa ba (Asb) The ASB sets orth the rules or ethics

and competency in developing an appraisal and reporting its results within the

Uniorm Standards o Proessional Appraisal Practice(USPAP).

Aa Qaat ba (AQb) The AQB establishes the minimumqualication criteria or state licensing, certication and recertication o real

property appraisers.


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caa A shortened term or similar property sales, used or

comparison in the valuation process; also called comps.

ct Aa A set o procedures through which a value is derived

or a property by estimating the current cost to construct a reproduction o

(or replacement or) the existing structure. This estimate includes deducting

depreciation rom the total cost, and adding the estimated land value.

c aaa A credible appraisal is one that is worthy o belie.

A credible appraisal provides support, by relevant evidence and logic, or the

opinion o value.

i Aa A set o procedures through which an appraiser derives

a value or an income-producing property by converting its anticipated cash

fows into property value.

l a ct Aa Appraisers are licensed and certied

by the state appraiser regulatory agencies, ater meeting minimum education,

experience and examination requirements. All states must adhere to, at a

minimum, the criteria established by the Appraiser Qualications Board o The

Appraisal Foundation.

mt lt s Typically the Multiple Listing Service is operated

by the local/regional REALTORS Associations and contains property listings,

sales and expired listings. Most Licensed and Certied Appraisers have access

to this inormation.

p ata Public record data include local, state and ederal

records and documents concerning the subject property and comparables. Formost residential properties, public records are maintained by the county or local

municipality and include the registry o deeds, tax assessment inormation, and

plat and survey records. Other records may include soil surveys, topography

maps, zoning maps, etc.

sa ca Aa A set o procedures in which a value is

derived by comparing the property being appraised to similar properties that

have been sold recently, then making adjustments to the sale prices o thecomparables based on their dierences to the property being appraised.


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W a aaa a?

The lender orders the appraisal to obtain an accurate description o the property

and an independent opinion o value. The lender uses the appraisal to document

that the real estate is appropriate collateral and determine whether the value o the

property is sucient to support the lending decision.

W t t t t t w

a t aaa ?

Federal banking regulations require the nancial institution to be the client,

regardless o who pays the ee.

hw t aa t a ?

The appraiser researches market data, public records and talks with buyers, sellers

and real estate brokers active in the market area. Data researched includes sales,

leases, and current listings o similar properties. Other data include land sales and

residential construction costs. Ater all actors aecting the value are considered, the

appraiser develops an opinion o value and prepares an appraisal report.

frequently Asked questions


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i a a at wt aa ta

ta t aa ? hw a t a?

The issue isnt so much distance or how ar is too ar, rather the question

that should be asked, Is an appraiser rom outside o my area competentto

appraise my property? Some appraisers work in many geographic areas and

are knowledgeable and competent in all o them. Other appraisers have a limited

range in which they normally appraise and they may not have the data or the

experience to be competent outside their local market.

Wat at i t t aa?

The more inormation the appraiser has about your property, the better he or

she will be able to develop a credible result. The appraiser will be interested in

knowing i there are any private agreements or restrictions, easements or rights

o way, encroachments, agreed to arrangements with abutters (e.g., ences,

walls) on the property, etc. The appraiser may ask about the propertys title, sales

and rental history, and occupancy. He or she might ask i the property is under

a pending purchase and sales agreement or option and, i so, the details about

the agreement or option. I the property sold in the past three years, the appraiser

may ask about the details o the transers. Finally, the appraiser may inquire about

physical characteristics o the property, including any additions, permits, etc.

I you are hiring the appraiser directly, the appraiser will want to know what the

intended use o the appraisal will be. (NOTE: I you are engaging the appraiser to

prepare an appraisal or a ederally-related transaction, you should know that the

lender or the lenders agent is required to engage the appraiser).

Wat t aa w t ?

Based on the clients intended use o the appraisal, the appraiser determines

whether an interior and/or exterior inspection or no inspection is required. Undermany circumstances, the lender will require a ull viewing o the property including

an exterior and interior inspection.

Assuming that a complete inspection is required, the appraiser inspects the site,

site improvements, and building improvements. The appraiser considers the sites

size, shape, topography, drainage, and any other attributes that may aect

value. He or she views the site improvements (e.g., paving, ences and walls,

landscaping) to determine their contribution o value to the property. Finally, theappraiser inspects any structures. Some o the items considered are building style,

number o stories, size, number o rooms (including bedrooms and baths, etc). He

or she observes the structures condition as an aid to estimating depreciation. In

addition, the appraiser considers the property as a whole, including the dwelling


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and any other improvements as well as any visible encumbrances (e.g. power

lines, encroachments). Finally, the appraiser considers the property in relation to the

neighborhood.

An appraisers inspection and a home inspection are dierent. An appraiser gathers

inormation to develop a value opinion and a home inspector gathers inormation to

identiy construction eatures, structural integrity and any needed repairs.

Wat a aa a aa t?

A comparable sale is a recent sale that is similar to the subject property in terms o

physical and unctional attributes and location. A comparable listing is a current

listing that is similar to the subject property in terms o physical and unctional

attributes and location. Comparable sales and listings are used in the sales

comparison approach. In most cases, the sales comparison approach is the most

reliable indicator o value or a residential property because it most directly refects

the actions o buyers and sellers in the market.

W a aa ak ajtt?

In developing an opinion o the value o a property, an appraiser considers

recent sales o similar properties. Generally speaking, the sales that are the most

similar to the property being appraised are the best indicators o value. However,since rarely are two properties exactly the same, the appraiser must account or

dierences between the property that sold and the property being appraised.

These dierences are called adjustments. Adjustments are added or subtracted

rom the sale prices o the comparables to indicated an adjusted sale price or the

property being appraised.

i wat ta w a aa t cost approach

a/ sales comparison approach?The cost approach is based on the premise that an inormed purchaser would pay

no more or the subject property than the cost o constructing a substitute property

with the same utility. Dierences between the sales comparison approach and the

cost approach are particularly evident when the property being appraised involves

older improvements where depreciation due to age and unctional obsolescence

are dicult to estimate, or when the improvements are relatively unique or

specialized and there are ew comparable properties. I completed correctly, under

ideal circumstances the indicated value by the cost approach should be similar tothe estimated value by the sales comparison approach.


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T aa t t a aa t a. i

tat k?

In most cases, yes. The income approach is based on the relationship o

anticipated benets (dollar income) to value. The income approach in residential

appraising generally consists o little more than a gross rent multiplier analysis (the

sale price o a property divided by its income potential). The gross rent multiplier

analysis is very reliable in markets where homes are rented and sold requently.

However, the income approach is not applicable when the property appraised is

located in a neighborhood where most homes are owner-occupied.

Wat t a aaa ?

Aclear,accuratedescriptionofthesubjectproperty

Salesthatarethemostrecentandmostcomparable

Commentsthatexplainimportantissuesintheappraisal

Anopinionofvaluesupportedbytheanalysisofthecomparablesales


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The Appraisal Foundation, a Congressionally authorized non-proft

organization established in 1987, is dedicated to the advancement o

proessional valuation. The Foundation accomplishes its mission through the

work o its three independent Boards: the Appraisal Practices Board (APB),the Appraiser Qualifcations Board (AQB), and the Appraisal Standards

Board (ASB). More inormation on The Appraisal Foundation is available at

www.appraisaloundation.org.

s oazat T Aaa at

Appraisal Sponsors:American Society o Appraisers

American Society o Farm Managers & Rural Appraisers

Appraisers Association o America

Instituto de Evaluadores de Puerto Rico

International Association o Assessing Ocers

International Right o Way Association

Massachusetts Board o Real Estate AppraisersNational Association o Independent Fee Appraisers

North Carolina Proessional Appraisers Coalition

Afliate Sponsors:

American Bankers Association

Farm Credit Council

National Association o Realtors

International Sponsor:

Royal Institution o Chartered Surveyors

JOIN US ON FACEBOOKwww.acebook.com/appraisaloundation


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a guide to understanding a residential appraisal

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