What is an appraisal?

I recently came across this great graphic by Title Source that goes through the home appraisal process and the appraisal basics. It briefly discusses what an appraisal is, why it is necessary, what appraisals are based on, what homebuyers need to know, appraisal myths and truths, etc. In the coming months, I will be unpacking each of these topics and going into more detail about each of the items shown in the “flowchart” to “pull back the curtain” in an effort to educate the consumer on the appraisal process and what they need to be aware of.

"An unbiased, professional opinion of value"

In the graphic they define the word "appraisal" as: "An unbiased professional opinion of value." For this first post in the series, let’s take a closer look at what those first three words really mean.

The word "unbiased" is pretty straightforward but what does it mean in relation to being a real estate appraiser? Essentially, it means that an appraiser is charged with being an independent party that cannot advocate for either side of the transaction. Appraisers should never advocate for a client's objective. Often a homeowner is hoping for a certain outcome. For example, if they are applying for a mortgage refinance or Home Equity Loan, they are wanting a higher appraised value. But if they are appealing their property taxes or settling an estate and planning on buying out the others in the estate, they most likely want a lower value. Another good example of this is when the intended use is for a divorce appraisal and we are asked to determine market value for a property that is owned by two people going through a divorce. Just because one spouse hires an appraiser doesn't mean that the appraiser is an advocate for their client. No, an appraiser's role is to provide an unbiased, well-supported opinion of value. This one word alone is an important one that separates us as appraisers from every other person involved in the transaction

The word "professional" could have easily been omitted from their definition of appraisal but it's telling that it was included. One reason is that all appraisers must be licensed and adhere to a professional set of Standards and Ethics as detailed by USPAP. We must take extensive amounts of appraisal coursework and also acquire a significant number of hours working on appraisal reports before becoming a licensed and certified appraiser. In order to maintain our license, we must also take a minimum number of hours of continuing education every 2 years. All of this means that appraisers are continually engaging with other appraisers and keeping abreast of the latest trends and changes in the appraisal profession. These experience and education requirements in combination with USPAP holding appraisers to a uniform standards and ethics, gives appraisers the tools and expertise in valuation methods and best practices. It is for these reasons that I believe the word “professional” is an important one.

Finally, we get to the word "opinion". While there is a lot of science involved and standard accepted methodology, there is also an art to appraising and the results are often subjective. Two appraiser can be hired to appraise the same property and may come to different value conclusions. Now, if they are both good appraisers with a strong knowledge of the market area and have well-researched and supported opinions of value, then the two opinions of value should be fairly close (typically within 5%). Real estate markets are imperfect due to many factors including different buyer/seller motivations and we cannot always account for some of these unknowns. However, we are trained to analyze all market data including interviewing market participants and use this information to provide an opinion of value that is indicative of the most probable sales price of a property.

So to summarize, you can reach out to any number of people to get an opinion of what your home might be worth. Each person is going to have an opinion based on, at the very least, their own experience and possibly their own best interest. But an appraiser follows a standardized set of best practices, analysis, and methodology that leads to a professional opinion of value that is above-all unbiased and well supported.

THE HOME APPRAISAL PROCESS - What you need to know as the buyer

To see the full graphic to see other topics I will be covering click the button below.  For Real Estate Agents, this may be a useful tool to provide your buyers/sellers with as a brief overview of the process.

Market Value: Probable Vs. Possible

Market Value DefinitionThe CU (Collateral Underwriter) is obviously a hot topic right now and there are many excellent blog posts written by fellow appraisers that point of many of its flaws (see the bottom of the page for links to those posts).  On a recent positive note, Fannie Mae recently sent a letter to its lender clients that included the statement, “Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such a sale would result in any material change to the appraisal report.  If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions.”

But what I want to touch on in this post is that the existence of the CU will more than likely change the approach of many appraisers (in a good way).  Why would this change an appraiser’s approach?  One of the answers lies in the definition of market value as defined by Fannie Mae.  Sometimes as appraisers, we may need to be reminded of one of the most important parts of this definition.  Fannie Mae’s definition is as follows:

Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  • buyer and seller are typically motivated;
  • both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
  • a reasonable time is allowed for exposure in the open market;
  • payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  • the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The key part of this definition that I am focusing on is “the most probable price”.  Not the highest possible price, the most probable.

As was recently pointed out on the Voice of Appraisal with Phil Crawford recently, “Possibilities and probabilities are two totally different things”.  Prior to the HVCC, it was not uncommon for appraisers to be asked by loan officers, “What is the highest value you can appraise this property for?”.  The HVCC eliminated much of that by adding a layer of protection (and in-consequently taking a chainsaw to our standard fees).  However, there were still appraisers that would search the neighborhood and cherry pick a few of the highest sales in an effort to support the purchase price.  However with the CU, if only the 3 comparable sales with the highest sales prices are used, the CU will most likely bring that to the attention of the lender, who could in turn bring it to the attention of the appraiser.  If you are appraising a home that has 10 similar sales in the neighborhood and you use the three highest, the appraiser better have support and be prepared to explain why their value is at the upper end of the range.  That is not to say that in certain circumstances it should not be at the upper end of the range (superior condition, superior quality of construction, larger lot size, superior view, larger GLA, etc).  But if the subject is in the middle of the range when compared to the comparable sales in terms of many of the factors that affect value (GLA, condition, quality of construction, bed and bath count, view, location, basement area and finished basement area, lot size, etc), then the final opinion of value should not be at the extreme high or low end of the range.  Again, our job is to determine the most PROBABLE price the property would sell for, not the highest POSSIBLE price.  This should also help keep artificially inflated appraisals out of the refinance and home equity markets.

How this plays out over the long term remains to be seen.  I know most appraisers have much bigger concerns with CU and how it will impact our profession in the short and long term, as do I.  It’s just that these issues have have all been written about by other appraisers.  I just thought I would suggest a revisiting of the definition of market value.  The “most probable and not highest possible” portion of the definition is also something that appraisers can point out to educate your clients and even real estate agents when your opinion of value is below a contract price.

Links to additional articles on the CU:

 

Rowe Appraisal Group specializes in real estate appraisals for divorce, estates, pre-listings and more throughout the Chicagoland area.  If you have any real estate appraisal questions, please feel free to call us at (847) 863-5776 or email paul@roweappraisalgroup.com.

Top Factors Affecting Your Chicago Real Estate Value

I often get asked while completing appraisal inspections, “Do you count X when you do appraisals?”.  The short answer is that we try to consider everything that a typical buyer for that property would consider.  Below are some of the top factors affecting home values from a Chicago real estate appraiser’s perspective.

 

Location or Neighborhood

In Chicago, the neighborhood you live in can have a drastic effect on your properties value.  Your home’s proximity to public transportation (CTA or Metra stations) as well as restaurants, shopping, grocery stores, quality schools, parks, etc all affect value. Conversely, having a location with noise pollution can have an adverse effect on your home’s value (directly across from train tracks, on a busy street, next to a gas station, etc.)Es war einmal in Deutschland 2017 movie download

 

Gross Living Area (GLA)

GLA is defined as all liveable space that is 100% above grade (Gary Kristensen has a great article and video that goes into further depth). The amount of value per square foot is determined on a case by case basis depending on many factors.

 

Condition or Effective age

The effective age of the home is determined by the amount of updating or overall condition. For example a home built in 1955 could have a 10 year effective age if the home has recently had a significant amount of renovations completed. Keep in mind that just because you spend $25,000 on a new kitchen that does not necessarily increase your home’s value by exactly that amount.

 

Quality of Construction

This refers to the materials used to build the home and the overall quality of finishes on both the interior and exterior. For example, an all brick home compared to a home with aluminum siding or stucco, granite countertops compared to laminate countertops, hardwood flooring compared to carpeting, solid core 6-panel interior doors compared to hollow core flat panel doors, etc.

 

Lot size

A larger lot can add significant value. This is especially true when looking at possible “tear downs” in Chicago because the size of the new construction home is typically limited by the zoning department to a percentage of the size of the lot. A 30’ x 125’ lot compared to a 25’ x 125’ lot can have a significantly higher value in areas where there is a demand for buildable lots like Lincoln Park, Old Town, Gold Coast, etc. As you get further out on the northwest side and there is not as much demand for new construction, a larger lot could mean room for a side driveway.

 

Bed and bath count

Generally speaking, more is better. However, in many neighborhoods there is no discernable difference in value between a 4 bedroom and 5 bedroom home. The law of diminishing returns typically will apply. For example, the difference in value between adding a full bath to a 1 bath home is typically greater than adding a 4th bath to a 3 bath home.

 

View

This can be best demonstrated by condos in Chicago high rise buildings. Two units that sold at the same time, with the same floor plan, located on the same floor, but with different exposures will likely have different values. The one that faces west and only has a city view vs. the other unit that faces east and has a view of Lake Michigan can have as much as a 10-15% difference in value.

 

Additional features

These are things like fireplaces, decks, porches, patios, garages, landscaping, layout (open floor plan vs. closed/boxy layout), etc.  Jeff Hamric discusses floor plans with functional obsolescence here.

 

While these are the top features that influence value, there are many other things real estate appraisers consider. If you have any questions on how any of these items may specifically affect your situation, please feel free to post a comment below or call me at (847) 863-5776.

The Cheapest Appraiser

Good work ain't cheap cheap work ain't goodLooking for the cheapest appraiser?  Be careful, not all appraisers were created equal. Hiring the cheapest appraiser can often lead to a poor quality appraisal that could have serious consequences.  I can’t tell you the number of times I get a call from a homeowner and the first thing they say is, “Hi, how much do you charge for an appraisal?”  I don’t blame the homeowner for asking this question. It is certainly a valid one.  But is it the most important one?  The old saying “You get what you pay for” holds true in the appraisal profession just as it does everywhere else.  Here are some other important qualifications and attributes you should be looking for when considering which appraiser to hire:

  • The Consultation: One of the biggest complaints I hear from my clients about past experiences with appraisers are regarding the appraiser being in a hurry. I hear things like, “The appraiser was here for 10 minutes, barely asked me any questions, and then a few days later emailed me a report. I had no idea what I was looking at or how they determined what my house is worth.” To me, it is imperative that you understand the information I have provided you in the report. I believe (and my clients agree) that this is what separates me from most appraisers. When you hire me there is a consultation that takes place at the initial inspection. But equally important to the initial one is the one that takes place when I return to deliver the report. By delivering the report in person, I am able to go over the entire report and making sure that you understand everything in the report and ALL of your questions have been answered. It is something that clients have praised me for over and over. Check out my Google Business Page , Yelp reviews , and my Testimonials page to see what past clients have said. Please refer to my article, “The Secret to a Stress-free Appraisal Experience” for more detail on this very important step.

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