What is an Appraisal?
An Appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the
loan program) 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" typically a state-licensed professional who is
trained to render expert opinions concerning property values, its location, amenities, and physical conditions.
Why get an Appraisal?
Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get
Contesting high property taxes
Establishing the replacement cost for insurance purposes
Negotiating tool in real estate transactions
Determining a reasonable price when selling real estate
Protecting your rights in an eminent domain case
A government agency requirement
What are Appraisal Methods?
There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After
thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied
properties, the Sales Comparison
Approach is heavily weighted by an Appraiser.
Cost Approach – A formula is used to obtain the property value: Land value (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 – The Appraiser identifies 3 to 4 comparable comps recently sold properties in the
neighbourhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison
is done between the recently sold properties and the subject property including square footage, number of
bedrooms and bathrooms, property age, lot size, view, and property condition.
Income Approach – The potential net income of the property is capitalized to arrive at a property value.
Capitalization is the process of converting a future income stream into a present value. This approach is suited
to income-providing properties and is used in conjunction with other valuation methods
Who owns the Appraisal?
The mortgage company owns the appraisal even though the borrower paid for it. This is because the mortgage
company orders the appraisal on the borrower's behalf, and the Appraiser lists that mortgage company on the
report. The borrower does have the right to receive a copy; however it's the mortgage company's discretion to
give the borrower the original appraisal report.
Can Another Mortgage Company be Used After the Completed Appraisal?
Yes. In most cases you will not have to pay for another appraisal if you change your mortgage company, and
depending on the loan program typed, the first lender can transfer it to the new lender. Some appraisal firms may
charge a small fee because additional clerical work is required to reflect the new mortgage company; this is called
an "Appraisal Retype Fee". The original mortgage company has the right to refuse to transfer the appraisal to
another lender. In this case, a new appraisal is needed.
Who determines the market value of a property?
The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don't order
an appraisal because they want to obtain the highest price for their home and therefore don't want to be bound
by the Appraiser's assessment. The real estate agent receives a percentage of the price as compensation and
often represents the seller in the transaction and assists them in setting the sale price. They perform a
Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an
Appraiser's License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent
property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller
based on the CMA however the seller may choose to list their property for a higher price.
How can I assist my Appraiser?
It's to your advantage to help the Appraiser perform the assessment by providing additional information:
What is the purpose for the appraisal?
Is the property listed for sale, and if so, for what price and with whom?
Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what
interest rate, or other type of financing?
Are any personal properties or appliances included in the property?
With an income-producing property, what is the income breakdown and expenses for the last year or two? A
copy of the lease may be required.
Provide a copy of the deed, survey, purchase agreement, or additional property papers.
Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on
anything, i.e. sewer, water, etc.
Appraisals the Basics