By Dr. Ana Machuca, PhD, CPA, CFE, CGMA, Full-Time Faculty, Kaplan University
Published April 2015
What is an appraisal anyway?
It has been said that much of the housing market crash of 2008 was due to overvalued homes. Who calculates the value of houses? Houses are valued by an appraiser who prepares a report called an appraisal. According to Appraisal.org, an "appraisal is a thought process leading to a value conclusion." So now you are wondering what is included in the appraisal and who actually uses these reports and for what reason?
Most of the time the appraisal is used during real estate and mortgage transactions, but an appraisal may also be used for the following reasons:
- Obtain a loan
- Lower your tax burden
- Establish the replacement cost of insurance
- Contest high property taxes
- Settle an estate
- Provide a negotiating tool when purchasing real estate
- Determine a reasonable price when selling real estate
- Protect your rights in a condemnation case
- Property disputes
- Eminent domain
- Private mortgage insurance removal request
- If you are involved in a lawsuit
Since you are the paying client in this case, the report is submitted to you. If a lender has requested an appraisal, the appraiser is not required to give the homeowner a copy of the appraisal; however, a copy can be obtained from the lending institution upon request. Some appraisals will include pictures of the home as well as the comparable properties and can be as long as 150 pages (appraisal.org).
What does the appraisal report contain?
According to appraiserassociation.org, each report must reflect a credible estimate of value and identify the following:
1. Name and address of client
2. Name, contact information, and qualifications of the appraiser
3. Signed certification
4. Scope of work
5. Purpose of the appraisal
6. Type of report
7. Approach to value used and defined
8. Type of valuation used and defined
9. Marketplace in which valuation is applied (location and type)
10. Relevant dates
11. Description of appraised objects
12. Disclaimers, extraordinary assumptions, assumptions, and limitations
13. For appraisals relating to IRS usage, estate (e) or donation (d)
14. Additional description
15. Support for valuation conclusions
16. Support for valuation conclusions (if applicable)
17. General format
In most states, anyone (such as real estate agents) can do appraisals for non-lending purposes such as the ones listed above. However, only state licensed and certified appraisers who are subject to discipline by their state regulatory agency can prepare appraisals for lending institutions. Professional appraisers require training and experience in appraisal methods and techniques. To become a licensed appraiser most states require a period of supervision (meaning that you work under a licensed or certified appraiser) of usually 2,000 hours before you able to do appraisals on your own (appraisal.org).
What is exactly involved in the appraisal?
According to Ann O'Rourke, a professional appraiser, these are some of the steps she takes when preparing an appraisal: "I research public records information, get a plat map, check the zoning and flood data, and printout sales and listings of similar homes. During the inspection, I make a drawing of the home and other improvements such as a swimming pool and make notes on physical characteristics such as floor coverings and built in appliances. I check the site boundaries against my plat map. I look at the adjacent properties. After completing the inspection, I select comparable sales and listings and take photos of them. Back at the office, I contact real estate agents for more information on the sales terms, condition of the home, etc., reconcile conflicting information from different data sources, and write up the report" (appraisaltoday.com).
Are appraisers regulated?
Between the savings and loan crisis in the late 1980s and the housing crisis of 2008, appraisal licensing was established and required in every state. A few states require that all appraisals must be done by licensed or certified appraisers only, but most states only require licensed or certified appraisers for mortgage loans. State licensed appraisers can appraise residential properties and in some cases small apartment or commercial properties. Certified appraisers can appraise all types of properties. State certified appraisers have higher requirements than state licensed appraisers. (appraisaltoday.com).
The bottom line!
If you need an appraisal, make sure that the appraiser is licensed or certified by your state. If you are looking to sell a home, it is ok to have an appraisal prepared by a real estate agent, but I recommend that you have at least 3 agents provide you with an appraised estimate of the value of your home before making a decision. If you want a more accurate figure then you should engage a licensed appraiser, but you will have to pay for the appraisal and there is no warrantee that you will be able to sell at the appraised price. If you need an appraisal for any other reason, be sure to hire a licensed appraiser.
Dr. Ana Machuca is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.