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Resources & Information
Appraisals
What is an Appraisal?
An 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.
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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.
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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.
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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.
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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.
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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.
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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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