Why is an appraisal necessary?

Most appraisals are completed as part of the mortgage lending process, with the lender being the entity to request the appraisal. If you think of it this way, a bank has most of the money on the line. Before lending it to a borrower, they want to know whether that the property is worth the amount of money being borrowed to purchase it. The banks want to be sure that if for some reason the borrower stops making payments on the mortgage and stop paying off the loan, the bank can repossess the house and sell it in order to recoup the money lent in the first place. If an appraisal comes back to lender for far under the contract price, that would raise some concerns that the borrower is attempting to borrow more than the property is actually worth. Along with checking a borrower's credit score, debt-to-income ratio, etc., the appraisal helps the lender assess risk. This is known as the loan-to-value ratio. If a borrower is fronting 50% of the cost of the home for example, that means less risk for the bank. But if the borrower has a very small down payment and is borrowing 90% to 100% of the cost of the property then that is much more risky for the bank.

Other common reasons for an appraisal:

    • Estate Appraisal (Also known as a “Date of Death Appraisal”): When an estate transfers ownership because of a death or inheritance, in most cases a real estate appraisal is needed for tax purposes and often to determine a listing price for the home. (click here to read more)
    • Divorce Appraisal: For many couples, the marital residence is the largest asset obtained during the marriage and an accurate appraisal is extremely important (click here to read more)
    • Financial and Estate Planning: Financial and Estate Planners are often relied upon by their clients to provide sound, well-informed advice and the value of the real estate assets are often needed to develop the best and most effective strategies for their clients (click here to read more)
    • PMI Removal: If you purchased your home with conventional financing and put less than 20% down, it’s likely you’re paying PMI. If your property value has appreciated, providing your lender with an appraisal can help remove this additional cost (click to read more).
    • Tax Assessment Appeals: Most real estate and property taxes are based upon the value of the property. When the taxing agency values your property at a higher rate than the actual value, you are paying too much in taxes (click here to read more).
    • Pre-listing, Pre-Purchase, FSBO’s: When trying to establish a fair list price is often difficult to sift through all of the market data to determine a true value for your home. Itt’s common for homeowners and realtors to rely on appraisers for assistance when establishing a list price for the sale of their home (click here to read more).

A few words from our clients

Paul Rowe is a consummate professional. In appraisal work there are hard facts and there is nuance. Paul does not ignore factors that are outside of the facts that could influence the value of a piece of property - such as litigation regarding the property, conditions of the immediate neighborhood that might not be affecting other similar properties a few blocks away. Paul digs in, does his due diligence and is able to come up with a number that not only can be relied upon but can stand up in court (and has). Absolutely one the top appraisers in the Chicago metropolitan area.

Erica Minchella
Attorney

Use Rowe Appraisal if you are looking for a knowledgeable and helpful company.

Jamie Bernhardt
Real Estate Agent

Call us today for a free consultation.

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.

Real Estate and Price Per Square Foot

Appraiser vs. Home Inspector – What’s the Diff?

Often before a property is purchased using a loan from a mortgage company, it must be appraised and inspected. Many homeowners confuse the appraisal inspection and the home inspection and ask me what the difference is. Here are some of the main ways that appraisals and home inspections are different and also overlap.

Different End Goals: Value vs. Condition

The main thing to know is a real estate appraiser’s focus is on determining the value of the home and those factors that will influence that value. A Home Inspector’s main objective is determining the condition. The Home Inspector is tasked with determining the condition of the property in terms of structural soundness and quality/safety of electrical and plumbing systems. The Home Inspector has an obligation to be accurate in their assessment of a home’s condition but they also act as advocates for the buyer. Their job is to point out any deficiencies with the house such as outdated/unsafe wiring or obvious problems with the foundation so that their client (the buyer) can make an informed decision about whether to purchase the house, negotiate a lower contract price, or just walk away all together. See the graphic below for many of the items a home inspector will be looking at (Source: www.gqre.com).

While an appraiser’s inspection of the property may take into consideration many of the things a Home Inspector looks at, his/her ultimate goal is to provide an opinion of value. The appraiser’s job is to provide their client (the lender) an accurate, well-supported, unbiased opinion of value. This usually includes commentary on the condition of the property since that is tied to value. For example, a 1960’s ranch home in original condition will most likely have a lower value than a 1960’s ranch home in the same neighborhood that has an updated kitchen and bathrooms. The appraiser’s job is to give the bank their opinion of market value (I go into this in more detail on a prior post - Market Value: Probable vs. Possible) which helps them determine if the mortgage be a good, sound investment for the bank.

Appraisal Inspection vs. Home Inspection

So how will you tell the Appraiser and the Home Inspector apart when they come to your home? Probably they’ll introduce themselves as either the Appraiser or the Home Inspector. Just kidding!

The appraiser’s site visit will usually take around 30 minutes and they will measure your house and look at all of the rooms including the basement. They will be noting the quality and condition of the finishes, the layout, bed and bath count, etc. They will take pictures of each room to include in the appraisal report. In some cases, like for an FHA loan, the appraiser may inspect crawl spaces and attics or test the basic appliances. But he’s probably not going to crawl under the house to inspect the foundation or get on your roof and walk around looking for leaks.

Appraisers try to look at the property through the eyes of the most probable buyer for that particular property – not only which features and attributes they find desirable, but also to what extent would the typical buyers be “inspecting” the home? A more simplified way to look at it is to ask yourself: “If I were looking to purchase this house, what are the things I would look at and what things would I hire someone with professional experience to check?” You may open a cabinet or two, look at the ceilings for leaks, take a look at the mechanicals to see if they are newer or may need replaced soon. But in my experience, very few buyers will be going into crawl spaces and bringing their ladders to get on the roof. They are mainly interested in the functionality of the house such as how many bedroom and bathrooms, whether they like the layout of the floorplan, etc.  Here is a great video from a Portland appraiser, Gary Kristensen, that shows you what you can expect when an appraiser visits.

A Home Inspector will really get into the bones of the home. They will get on the roof, get into the crawl space, and analyze the structural integrity. A good Home Inspector will be able to find possible issues that the Appraiser may not such as termites, faulty electrical wiring, plumbing that is not up to code, structural issues, leaky roof, mold, etc. Now that I’ve scared you with all the things that could be wrong with a house you’re looking to purchase (!), I highly recommend that if you are buying a home you hire a licensed Home Inspector to complete a full home inspection because they will be able to tell you things about the home that the typical appraiser is not going to. If you don’t know a good home inspector in Chicagoland, we recommend Inspectrum. Click here for their website and contact info.


If you have any questions, please don't hesitate to call us at (847) 863-5776. We specialize in appraisals for estates, divorce, pre-listings, bankruptcy, etc.

Chicago Housing Styles

 

Chicago style bungalowReal estate agents and appraisers alike often struggle to define the architectural style for unusual or unique properties. Have you ever gotten a new listing, took one look and started scratching your head and asking yourself how you are going to describe this to prospective clients?

Even more basic properties can present a conundrum when they nod to more than one typical style. The web offers some great resources to both educate yourself on architectural styles and help make a decision once you start completing the listing form on the MLS. The National Association of Realtor’s website offers a good starting point (http://realtormag.realtor.org/home-and-design/guide-residential-styles).    This article covers common styles across the country but since many architectural designs end up including a number of different styles, it’s good to know your Craftsman from your Colonial. Sometimes it’s just a little bit of detail that turns a standard Cape Cod into a Tudor.

Chicago housing styles via Big Shoulders Realty

Chicago housing styles via Big Shoulders Realty

Fortunately, Chicago definitely has some set, easily identifiable housing types.  Big Shoulders Realty, a boutique brokerage firm in Chicago, has an excellent page on their website that provides brief histories and descriptions of housing styles common to Chicago that can be helpful when describing a property on MLS (click on the image above to go to the page).  Then click on the housing style and you are taken to a page that also shows you actual houses in Chicago that are of that style.  It really is the best resource online I have found for the Chicago market (it should be called “Chicago Housing Styles for Dummies”).

But what do you do when you have a more recently constructed property? How do you avoid using the catch-alls “Traditional” and “Contemporary”?  Really, I’m asking.  Feel free to comment below!  General consensus has it that “contemporary” means “of this time” or moment. Something funky, modern-looking or new could fall under that category. For a property where “traditional” seems like the only option, maybe pull out the most prominent feature, like a turret or full front porch or examine the roof line for any elements that point in one stylistic direction or the other.

Rowe Appraisal Group specializes in “non-lender” appraisals and we complete pre-listings appraisals for real estate agents and homeowners all the time.  Don’t hesitate to reach out to us if you ever have any questions.  You can reach us at (847) 863-5776 or email us at roweappraisalgroup@gmail.com.

Property Questionnaire for Real Estate Agents

A couple of days ago I was sitting down to start writing a blog post on how to streamline the initial appraisal process, specifically gathering information on the subject property prior to doing the inspection. Over the weekend I listened to an episode of the podcast “Voice of Appraisal” where Phil Crawford mentioned an improvement worksheet that the Ohio Coalition of Appraisal Professionals (OCAP) has distributed to local area realtors. I recently contacted him and Steve Papin, the president of OCAP, who was kind enough to send me a copy. Here is the PDF (Property Questionnaire), or you can email me and I can send you the Word Doc that is formatted properly).

The main purpose of the questionnaire is to gather information that might otherwise be difficult to obtain. As you can see, the form provides the listing agent an opportunity to list all recent updates and any other details they would want an appraiser to know. Instead of springing all these questions on the agent at the time of the  inspection, by emailing a copy in advance they can have the time to do any necessary research and talk to their clients about the property before you even go there. And since it’s fairly often that a property is on a lock-box, you may not even meet the Realtor. Finally, at the end of the day you’ll have a document that can easily be saved to your work file.

In doing more research on these types of questionnaires, I saw that Ryan Lundquist of Sacramento Appraisal Blog, has also shared a “cheat sheet” that you can download here. This morning I was all set to wrap up my blog post by outlining even more benefits to these forms when I saw that Tom Horn, appraiser and author of the Birmingham Appraisal Blog, posted his own version of the “Property Questionnaire” here. So, clearly something is in the air folks! Tom’s blog post, as always, is top notch and has lots of good tips and suggestions for agents and homeowners alike.

I will most likely be creating my own form based on these three examples to include a section for any other additional features that the agent feels adds value to the property, or specific neighborhood info that the agent thinks is important. I suggest you do the same. Choose your own adventure or tailor one of these questionnaires to fit the Real Estate Agents in your own market! Once I’ve gotten mine whipped into shape, I’ll post it to my blog.

The Housing Value of Every County in the U.S.

The Housing Value of Every County in the U.S.

I recently came across this map posted on Twitter by Max Galka of Metrocosm.com.  It shows a map of the U.S. with the land area of each of the individual counties being substituted by the total market value of the housing.  Keep in mind that this is the sum of the values for each county, which is going to be skewed by population; nevertheless, this GIF is way too cool not to share.  


I found this map is really hypnotic.  Several times while typing this post I have found myself zoned out just staring at it.  Anyone else?

Also, I would love to see this type of map that separates out all of the Chicago neighborhoods and suburbs.  My guess would be the North Shore, downtown and Lincoln Park in Chicago, and the Hinsdale/Oakbrook area would be the largest.



Appraisal Industry: The Tide May Be Shifting

Appraisal IndustryWith all of the changes happening in the appraisal industry right now, I thought I would share this article I did for Working RE a little less than a year ago that detailed my personal journey. In the article I made reference to some of the positives in the appraisal industry:

Excerpt from the Working RE article titled Taking Success into My Own Hands:

There is a lot of negativity in the appraisal industry and without question, certain things need to change. However, there are also a lot of positives appraisers can focus on to improve their business.

The Appraiser Movement

Today, with the help of technology and social media, I feel the momentum may be shifting in the appraiser’s favor.  The title of the article was “Taking Success into my Own Hands”.  Now, I think there is a new appraiser movement that is taking success into our own hands.  There are new internet shows like Phil Crawford’s “Voice of Appraisal” and Dustin Harris’s “The Appraiser Coach Podcast” that are helping get the word out for on behalf of the residential appraiser.  There are public Facebook groups and private members only groups like “Appraiser Insider” that has not only helped my business, but completely transformed it.  You also have bloggers like Gary KristensenLori NobleTom HornBill CobbRyan Lundquist, and many more¹ who are helping educating real estate agents, homeowners, attorneys, and calling out injustices in the industry.

Just as recently as a month ago, after an AMC tried to demand the entire work file be submitted with their appraisal reports, the bloggers, appraisal shows, and Facebook groups got the word out and due to public backlash, essentially shut that down and within a week the company published a revision to the new requirement.  We also recently saw the first “administrative fee” of $5000 to a company for not paying “Customary and Reasonable Fees” in Louisiana³.  Individual state Coalitions like Illinois’ own ICAP, headed by current president Rick Hiton, are really making some positive headway with state legislators.  Multiple state coalitions are even getting together to discuss ideas and plans for the betterment of the appraisal industry.  Yes, the appraisal industry appears to finally becoming more united.

With what appears could be an appraiser shortage on the horizon, we are going to need some changes to the requirements to becoming an appraiser or  change how trainees can be used and thus facilitate more appraisers coming into the industry.  To that point, I recently received an email from a major national bank who refined its expectations regarding the involvement of appraiser trainees.  They no longer require supervisory appraisers to be physically present with trainee appraisers at all subject property inspections and driving comparable sales.  This will allow us to not only train the next generation of appraisers, but make it financially feasible to do so.  We have seen a lot of “monkey see monkey do” in negative ways with banks and AMC’s in the past, but this is one trend that I would love to see catch on.

I don’t pretend to know where the appraisal profession will be in 5 years with UAD concerns, appraiser shortages, AVM’s, reasonable and customary fees, etc.  There are many more battles that will need to be fought.  But again, a year later, with more public voices out there speaking on behalf of the real estate appraiser, I still think there is still reason for optimism.

Update On My Journey

Like many appraisers right now with rates near all time lows, I have never been busier.   My average fees have never been higher.  I have been able to increase my standard fee over 20% and was even contacted by one client to let me know they were increasing the standard fee without me asking.  I have also been able to leverage my website into more and more non lender work.  This allows my business to be more diversified and not have to worry about interest rates spiking or a major change in order volume from my best clients.  People will never stop getting divorced and never stop dying (divorce and estate appraisals).  Both are a major source of non-lender appraisal work. Working with clients for “pre-listing” or “pre-purchase appraisals” is one of my favorite types of assignments as it allows me to interact more with the client and really explain the appraisal process and how my opinion of value was determined.

I am continuing to reach out to other appraisers in my area and the Appraiser Insider group to discuss strategies and industry topics.  I just finished the second part of a 4-day “Green and Sustainable Buildings” appraisal course from the Appraisal Institute in Palm Desert, CA (the class is actually free as it is being sponsored by Build it Green²).  While currently there isn’t a big demand for valuing solar and other green residential homes in Chicago, I feel there may be in the near future and want to make sure I at least have a basic understanding.

If you have any thoughts or anecdotal evidence of where you may think the industry may be headed, please feel free to post a comment below to continue the discussion.

 

¹ Mike Turner, Michael Coyle, Jonathon Montgomery, Jeff Hamric

² These FREE classes will be offered again in Laguna in September.  Appraisers who complete the courses will have them name listed on the Appraisal Institutes Green Registry.

³ I was just forwarded an email from Pierce Blitch, III, IFAS from Georgia indicating that they too have completed a Fee Survey for Reasonable and Customary.  It appears their bill has passed both houses and was signed by the Governor.  More evidence that change is on its way!

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.

Paired Sales in the Chicago Condo Real Estate Market

Chicago Condo Garden

With all of the discussion regarding the CU (Collateral Underwriter) and using regression analysis to support adjustments, I thought I would share a recent, good old fashioned Paired Sales Analysis (Matched Pairs) to determine an adjustment for a Garden unit vs. a high first floor unit.  The idea behind paired sales is to find 2 or more sales that sold around the same time, in the same location, that are the same with the exception of one feature.  The difference between to the two sales price should give you a supportable adjustment.  The best thing about condo conversions in Chicago, is that when they are converted from apartments, the building and units are often rehabbed and resold around the same time.  Even better, they are often rehabbed by the developer with similar finishes in each of the units.  When the garden unit has the same floor plan as the units above it, it creates a perfect data set to extract a matched paired sales adjustment.  You have similar location (same address), they typically sell with a few months of each other, and are similar in bed and bath count, GLA, etc.

I was appraising a garden unit in on the northwest side of Chicago.  While I was able to find other recent sales of garden units for comparable sales, I needed to use a non garden unit to bracket a particular feature.  After pulling 3 recent garden unit sales, I found out when the buildings were converted and look up the sales prices of each of the units at that time.  Here is the data below:


Chicago real estate apprasier

As you can see above, I have four different paired sales to analyze.  One building actually provided two sets as the two units both sold again recently within 2 months of each other.  The percentage difference ranged from 9.2% – 15.3%.  After average all four percentages, I was able to come up with a 12.5% adjustment for the difference between a garden unit and the unit above it.  When the CU comes back and I am asked why I gave such a large (or small, who knows with CU) adjustment for floor level, I can cut and paste this into the addendum.  Or better yet, just put in into the report in the first place and hopefully avoid the hassle.

While this ended up working out really nice and neat for this appraisal, my fellow appraisers will attest to the fact that finding good paired sales in all circumstances in just a pipe dream.  I just thought I would share one example in which it worked out really well.  I have been testing many of the recent regression tools available for appraisers and have found a couple to be really promising.  Once I learn all of the nuances and techniques, I believe they will be extremely helpful in many situations.  But those of you who have tested them know, they often give some crazy results and other methods will still be necessary.  My favorite so far is PAIRS, by Gandysoft.  Please leave a comment and let me know which software you are finding to be the most useful so far.

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