An appraisal is an opinion of value, typically based on the property’s location and zoning, the age and condition of buildings, and the prices recently paid for comparable properties. Appraisals are most commonly done in connection with the sale of property, but they can be done for other reasons, such as estate planning, probate, or valuing it for condemnation.
Did You Know?
Appraisals are often required for home mortgages because lenders want to ensure that they will be able to recover the value of the loan by selling the property if the borrower defaults.
Selecting an Appraiser
It is important that the appraiser be both independent of the interests of any other party, such as the seller or lender, and be qualified. All states have programs for licensing or certifying appraisers. In most states, participation is mandatory.
The financial meltdown of 2008 changed the appraisal industry. Under the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. § 3331, and 15 U.S.C. § 1639h, the Appraisal Subcommittee of the Federal Financial Institutions Examination Council is responsible for monitoring state appraiser regulatory programs. Before the enactment, there was no uniform system of licensing appraisers or of appraiser education and experience qualification standards, no universally accepted standard for appraisal content, and no federal law requiring the use of appraisals. The Act created a regulatory framework and mandates the use of an appraiser who is in good standing with such a licensing or certification program for any loan that involves a federal agency, such as the FDIC. The standards include a required property visit for appraisals of a home financed by a high-risk mortgage, conditions for a second appraisal at no cost to the home purchaser, and mandatory independence for appraisers.
An appraiser typically visits and inspects the property and researches recent sales and public records, such as zoning, building code violations, and tax records, before issuing a report. In some cases, the appraiser may examine additional material, such as soil tests or records of income and expenses.
Comparable sales are often the primary factor in determining value, particularly for residential property. Since no two properties are truly identical, the appraiser must make adjustments for differences in age, condition, or size. Some properties are truly unique, so that data on comparable sales is not available. In such cases, the appraiser may calculate the replacement cost of the structure, minus depreciation, plus land value. If the property generates income, that may be the primary factor in determining value. There are many ways to calculate a property’s income value, and the approach used may depend on the purpose of the appraisal. For example, in valuing a property for probate, the goal is to identify the value as of the date of the owner’s death, while a sale of property involves broader considerations.
An appraisal lower than a home’s purchase price may stall the closing and result in a price reduction or a second opinion.
The appraiser’s report must justify its conclusion about value. It should contain specific references and explanations, such as the date of any survey consulted by the appraiser, the reasons for discounting or relying on particular comparable sales, and the zoning regulations that were taken into consideration. In evaluating a report, keep in mind that an appraiser does not establish value but only gives a professional opinion of value at a particular time. That opinion may be influenced by unusual conditions, such as the presence of foreclosure properties in the area. As with all professional services, it is sometimes wise to get a second opinion.