ASG Appraising 101

Commonly Asked Questions...

What is an appraisal?
An appraisal is the act or process of estimating value – typically market value (for residential properties).  It involves the assembly of information on the subject property in addition to the collection of a significant amount of market data, and the analysis of trends within a specific market area. This information is then communicated to the client in the form of an appraisal report.

What is an appraisal report?
The appraisal report is the document or information that is transmitted to the client upon completion of an appraisal assignment. It can be any form of communication, written or oral; however, the report format options and file requirements are set forth by the Uniform Standards of Professional Appraisal Practice.

What is “market value”?
There have been many legal and economic definitions of market value that have been refined over the years. The most familiar definition used by appraisers is:

The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all condition requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.

What is the role of the appraiser?
The role of your appraiser is to provide an impartial and accurate opinion of real estate value. The appraiser is the disinterested third party providing assistance to those who own, sell, invest in, and/or lend money on the security of real estate. A seasoned and ethical appraiser brings knowledge, experience, and trust to the transaction and help protects the consumer from overpaying for a property, and the lenders from over-lending to buyers.

What qualifications must appraisers have?
At the minimum, all states require appraisers to be state licensed or certified. In the State of Pennsylvania, there are three sets of licensed appraisers.  Broker-appraisers are real estate brokers who sell as well as value real estate; this category was a limited window for real estate brokers who wanted the option to also continue valuing real estate in the state of Pennsylvania. The next category is the Residential Appraiser certification, in which these appraisers value residential properties and small multi-unit apartment buildings. The last category is the General Appraiser certification, in which these appraisers can value any type of real estate – commercial retail or office, industrial, mixed-use properties, or multi-million dollar residential real estate. 

What are the parts of a residential appraisal report?
A typical residential appraisal report consists of: a legal description of the property, a description of the interior and exterior components of the property, exterior measurements of all buildings on the site, a description of the local market/neighborhood, and information regarding the current real estate activity and market trends of the area. Listings and sales of comparable properties, like the subject, are then researched and analyzed. The three most similar comparable, settled sales are then put on a sales comparison grid to make plus/minus adjustments to them, and bring them in line with the subject variables. This is a very brief definition of the Direct Sales Comparison Approach. Typical consideration is also given to the Income Approach (potential income stream of the subject property) and the Cost Approach (depreciated value of the improvements plus land value). Although there are many report formats available in the marketplace today, the most widely used format is the Fannie Mae form 1004. Click here to see the 1004 form for additional details.

A typical homeowner, in the middle of refinancing, will say, “I just purchased my home last year for $145,000.  Since then, I’ve finished off the basement and put in a new kitchen at a total cost of $40,000.  So my home must be worth $185,000+.”
This is a common misconception by property owners. COST IS NOT VALUE. The home may be worth $185,000 or it may not. As described above, the value of your residential property is determined by a number of variables, including but not limited to: local real estate activity, market trends, comparable properties (with similar improvements) that have sold in your market within the past 12 months, etc. 

Another homeowner will ask, “You’re doing an appraisal on my property for my refinance at XYZ Bank. My property was last re-assessed by the County Board of Assessment in 1998. Will my taxes now go up, if you come in at a higher value?”
In this scenario, the purpose of the appraisal is for mortgage lending at XYZ Bank. The appraisal report, upon completion, is sent out to the client, namely XYZ Bank, and is confidential by nature. The appraiser has no affiliation with the County Board of Assessment, and the assignment has no bearing on the real estate tax bill for the subject property.