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Appraisals
What
is an 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 state-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 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
- Lawsuit
What
are Appraisal Methods ?
Appraisers use three common approaches when
establishing the value of a given property:
- 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.
- 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.
- 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.
Can I use another mortgage company
even after the appraisal has been completed
?
Yes. In most cases, changing your mortgage
company does not mean you will have to pay for
another appraisal. The first lender can transfer
the appraisal to your new lender. Some appraisal
firms may charge a small fee, however, because
there is clerical work involved in editing the
appraisal to reflect the new mortgage company.
This fee is called an "Appraisal Retype
Fee." The original mortgage company has
the right to refuse to transfer the appraisal
to another lender. In this event, you will need
to get a new appraisal.
Who
determines the market value of a property ?
The seller of the property is the person who
sets the price of the property (specially residential
property), and not an appraiser. This is because
sellers normally do not order an appraisal when
selling their homes. Sellers wish to obtain
the highest selling price possible for their
homes and hence do not want to be bound by the
appraiser's assessment of their home. The real
estate agent, who receives a percentage of the
price as compensation and often represents the
seller in the transaction, normally assists
the seller in setting the sale price.
The real estate agent performs a comparative
market analysis (CMA). The appraisal laws in
most states allow real estate agents to perform
CMAs without an appraiser's license or certification.
A CMA is a necessary part of the agent's preparation
for a listing and consists of examining sales
of properties in the area to arrive at a listing
price. The reliability of the CMA depends upon
the agent's experience and the characteristics
of the property and the surrounding area. Typically,
the agent will suggest a selling price to the
seller based upon the analysis. However, the
seller may not accept that price and choose
to list the property for a higher price.
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
[FHA, VA etc.], 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.
- Provide a copy of deed, survey, purchase
agreement or other pertinent papers pertaining
to the property.
- Provide a copy of current real estate tax
bill, statement of special assessments, balance
owing and on what [sewer, water, etc.].
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