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.

Park Ridge Single Family Housing Market

Park Ridge Home valuesThere has been a lot of discussion in the national news about a cooling housing market.  As a real estate appraiser with my office in Park Ridge Illinois, I’m providing a little insight into how we can dig deeper into the local market to get an idea of which direction home prices may be headed in the near term.   I looked at several different metrics for single family homes in Park Ridge (charts attached are interactive).

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Year-Over-Year Median Sales Price (Rolling 12 month average) – As you can see below the trend is still headed higher (12.6% increase year-over-year)

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Months supply of inventory – Supply is down to 4.1 months of inventory (down 13.6% year-over-year)

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Average Market Time – The average time it takes to sell a house is significantly less (down 41% year-over-year)

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List to Sales Price Ratio – The amount the home sells for vs. what it was most recently listed for is also improving (approximately 96%)

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Overall, these are all positive signs, but they are statistics that are in the “rear view mirror”.  As I analyze the market to help homeowners determine an appropriate  listing price for their home, (click here for more info on that process) I analyze forward looking indicators in an effort to be aware of what may be in store for the market.

After noting the current median sales price of $394,000 and average sales price of $450,000, I compared those two data points to a more forward looking data point, pending sales.  The current median list price of the 82 detached homes currently under contract is $439,000 and the average is $498,000.  Those are a combined average of 11% higher than what has sold over the last 12 months.  As we know with the exception of a few hot markets, homes very seldom sell at list price.  Over the last 12 months, the list to sales price ratio is approximately 96% (see chart above).  Therefore, once the 4% is removed from the pending sale to anticipate the final sales price, there is still  a projected increase of 6.6% over the current 12 month sales data.

In summary, while the overall rate of increase in sales prices in Park Ridge appear to be slowing, the trend appears to be still pointing up in the near term.  The majority of these pending sales should close in the next 30-60 days, so it looks like Park Ridge should have some much needed momentum heading into the seasonally slower fall and winter months.   For more Park Ridge charts check out our Park Ridge Page.  If you have any questions, please feel free to call us anytime at (847) 863-5776.

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What You Need To Know About Your Divorce Appraisal

For many couples, the marital residence is the largest asset obtained during the marriage.  Whether you or your spouse wishes to retain the marital residence after the divorce, it is important that an accurate value is obtained for purposes of property division.  There are typically two options regarding the home.

  1. The property can be sold and the proceeds divided.
  2. If either party wants to remain in the home, they can pay a settlement to their spouse.

In either case, an appraisal is needed.  In scenario #1, an appraisal should be obtained to help determine a listing price in an effort to limit the time the house will be listed for sale and maximize the selling price.  In scenario #2, the judge will not make a ruling on the settlement or division of property without an appraisal by a certified real estate appraiser.  As to who is responsible for the appraisal fee remains at the discretion of an agreement between both parties or court ordered by the judge.

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Most Common FHA Real Estate Appraisal Repair Items

It can be very frustrating for a homeowner or real estate agent when you get feedback from the lender that there are certain items that must be repaired before closing.  That’s why it is important be aware of minimum FHA appraisal standards before a real estate appraiser visits your home. The following are the most common repairs I encounter in the Chicago area for which you should be prepared.  Many of these could be corrected prior to the appraisal inspection for relatively little time and cost.   This will insure that additional inspections are not required and prevent any re-inspection related delays.

  1. Chipped/Peeling Paint: As per FHA, any chipped or peeling paint in homes built prior to 1978 must be corrected.  That means the defective paint must be scraped, sanded and repainted to comply.  Also, all of the paint chips must be picked up off the ground and disposed of properly.  With all of the Cape Cod, Bungalow style homes in the Chicago area, this is one of the issue I come across most.  87%  of homes built prior to 1940 contain Lead-Based Paint.  See the this link to the EPA website for more information on Lead-Based Paint.

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