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               9 Things You May Not Know About Appraisals 

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1) What is an Appraisal? 

 

 An appraisal is a valuation of property, such as real estate, a   business, collectible, or an antique, by the estimate of an   authorized person. The authorized appraiser must have a   designation from a regulatory body governing the jurisdiction of   the appraiser. Appraisals used the transfer of real property   insurance proposes, and to the determine the amount if taxes   you are required to pay.  Listed below things you may or may not   know about a real property appraisal.

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• Appraisals help banks and other lenders avoid losses on a loan.

• A home appraisal can positive or negative impact the sale of a house or property.

• An appraisal is an assessment of the fair market value of a property, business, antique, or even a collectible.

• Appraisals can be done for many reasons such as tax purposes when valuing charitable donations.

• Appraisals are often used in Devoice Settlements.  

• Appraisals are used in eminent domain cases.

• PMI removal

• REO/Foreclosure

• FHA/ VA loans

• Property Liquidation

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 2)  What is a Retrospective Appraisal?

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 Most appraisals are prepared with a current “as of” date. However,   in some cases, it is necessary to develop an appraisal as a prior date   from the past. There are many reasons for this, such as court case,   estate settlements, income tax reasons, and property disputes.   Appraisers call this Retrospective Appraisal or a Retrospective   Value. Historical data is used to support this value based on a date in   the past.This can be very difficult if you have limited amount of   data.

 

 Appraiser can use a number of valuation methods and techniques to   determine the appropriate value of an item or property, including   comparing the current market value of similar properties or   objects.  Listed below are a number of appraisal techniques:

 

• Sales Comparison Approach: The sales comparison approach assumes that prior sales of similar properties provide the best indication of a property’s value.  For this method, investors leverage commercial real estate comps, either within their proprietary database or in a third-party database.  It’s traditionally used for residential real estate, but can hold value for commercial investors as well, particularly for raw land and large developments.

 

• Income Approach: The income approach appraisal is based on the philosophy that a building’s value should be based on the revenue it generates.

 

 To calculate the building’s value with this real estate valuation   method, start by subtracting the operating costs from the revenue,   which yields the net operating income. Then, divide the NOI by the   cap rate.

 

There are two different formulas for the income approach appraisal: the direct capitalization method and the yield capitalization method. The former assumes that revenue will remain the same, while the latter acknowledges that revenue changes as tenancies change.

 

Because this real estate property valuation method depends entirely on revenue, it’s not the ideal choice for owner-occupied properties.

 

• Cost Approach: The cost approach appraisal method follows the premise that the value of a building should be roughly equivalent to the cost one might incur in building an identical structure.  This real estate appraisal method embraces the idea that investors should never spend more to purchase a property than they would building the same one.

       

   Costs to Build New can be calculated a number of different ways:

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• Segregated Cost Method: The Segregated Cost Method is designed to enable the appraiser/ assessor to give separate consideration to all of the major construction assemblies or systems (components) of a building to arrive at a reliable replacement cost in a reasonably short time. The costs of many parts of a building, such as floor, ceiling and lighting, change directly as the floor area of the building increases. Other building costs vary with relation to parameters other than floor area; however, most costs can be related to floor area, wall area, roof area or sometimes an individual count of unit installations. To facilitate the application of these individualized costs, they are grouped so that all costs related to floor area can be added together and applied to the total floor area. All wall area costs can be added together and applied to the wall area and all roof costs applied to the ground floor or roofed area.

 

• Comparative Unit Method:  Calculates a lump-sum estimate for the costs to build new on a per square foot basis, looking at different categories of construction materials (e.g., steel frame vs. concrete frame, interior or exterior load bearing walls).

 

• Quantity Survey Method: This method is considered the most accurate form of determining cost, but it’s also the most time-intensive method. The quantity survey method includes a detailed estimate for each building component and material down to the exact quantity needed to replicate the structure, and then adjusts for labor and other overhead accordingly.

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• Unit-in-Place Method:  Takes the segregated cost method to the next level by breaking down building components even further. For instance, it would analyze a roof not as a whole structure, but rather in terms of the individual pieces of the roof like joists and decking plates.

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 Accumulated depreciation can be calculated using the straight-   line method, which in commercial real estate, depreciates an   asset equally over a 39-year period (per IRS guidelines).

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 An alternative way to calculate accumulated depreciation is by   doing a cost-segregation study, which looks at the lifespan of   individual building components, allowing depreciation to be front-loaded instead of equally over time.

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 The cost approach isn’t used very often, but it is most useful   when a property is located in a less-than-active market where   the data to feed the alternative approaches can be hard to   come by.

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 Price Per Square Foot Method:

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 The price per square foot method of real estate appraisal   considers value through the lens of total space available.  For   the reason property values can vary dramatically from market

 to market, it’s crucial to benchmark within the same submarket. 

 

 For example, price per square foot can vary dramatically   between say, Cincinnati and Atlanta, and the different   neighborhoods within each of these cities.  This approach to   value works best as a secondary valuation method, paired with   other approaches, listed above.

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• Abstraction: The valuation of real estate is a central principle for all businesses.  Land and property are factors of production and, as with any other asset, the value of the land flows from the use to which it is put, and that in turn is dependent upon the demand (and supply) for the product that is produced.  Valuation, in its simplest form, is the determination of the amount for which the property will transact on a particular date.  However, there is a wide range of purposes for which valuations are required.  These range from valuations for purchase and sale, transfer, tax assessment, expropriation, inheritance or estate settlement, investment and financing.

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  3) Why do I need an appraisal?  If you are buying or refinancing a home, the lender will require an appraisal done as they need an impartial, professional opinion of value on the property to protect the equity in the property.  If you default on loan payment, the lender will frequently order an appraisal on the property.  

 If you're thinking about selling your home, you may want an   appraisal to get an idea of the home's value before talking to a   realtor or attempting a for-sale-by-owner.  Appraisals are also   done in divorce situations and for estate planning and   settlement purposes.

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  4) Are There Different Types of Home Appraisals?

 

  Yes, some appraisals requiring both an exterior and interior   inspection of the property are the known as full appraisals.

 

• Exterior inspection/ Drive-by appraisal:  This type of valuation is not as comprehensive as a full appraisal.  A drive-by is likely to be used when there's little question about the value of the home supporting the loan amount requested.  These appraisals are often used if the owner is taking out a home equity loan or line-of-credit.

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              How accurate can a drive-by appraisal be?

  

 5) Who Owns the Appraisal?  Good question. The person (or   company) ordering the appraisal owns it, and all the information   contained in that report.  The appraiser cannot release any of   that information to anyone else - period - without written   authorization from the party who ordered the report. 

 

  But I paid for it: So, you’re tell me, you can even tell me what   it appraised for? Appraisers receive calls all the time from   homeowner, realtor, brokers calling to see what the property   appraised came in at.  Appraisers cannot release that   information to anyone but the lender, the lender can share the   appraisal with the homeowner, the client, the realtor, etc.

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 6) What's the difference between appraisal and   assessment?

 

• An Appraisal: Is the value of your home determined by a professional appraiser.  A professional who has been certified/ licensed in your state to evaluate properties and determine their value depending on the current real estate market.

 

• An Assessment: Is what is used by municipalities and local governments. An assessment is really only for tax purposes determined by a government tax assessor. An assessment is what determines your property tax.

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