First Thing Everyone Ought To Know About An Appraisal!
December 13th, 2007Categories: Mortgage & Finance reVIEWS, North Georgia Real Estate VIEWS, Professional Associate reVIEWS
Have you ever wondered just exactly what an appraisal is, or what components make up an appraisal? This weeks phone calls have consisted mostly of folks wanting a Realtors advice of what to do when they receive a disappointing appraisal.
What some home owners or buyer’s sometimes don’t understand is that there are many guidelines that Appraisers must follow that are set forth by companies like FannieMae and governmental organizations like the Georgia Real Estate Commission. I have asked a business associate and good friend of mine Jason Farmer who owns Mountain Gateway Appraisal to prepare for me some of those guidelines to share with my readers that are common concerns of those involved in a real estate transaction here in the North Georgia Mountain Real Estate market for a future post. I want to introduce this series of posts with a simplistic answer to exactly what an appraisal is before we look into those guidelines.
A home purchase is the largest, single investment most people will ever make. Whether it’s a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.
Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The closing attorney ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
So who makes sure the value of the property is in line with the amount being paid?
There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.
This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receives - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.
The Inspection
So what goes into a real estate appraisal? It all starts with the inspection.
An appraisers duty is to inspect the property being appraised to ascertain the true status of that property.
He or she must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the house.
Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
Cost Approach
The cost approach is the easiest to understand.
The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised.
This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
Sales Comparison
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value.
Then, the appraiser researches recent sales in the vicinity and finds properties which are ”comparable” to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.
In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Reconciliation
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ”bidding wars” that may adjust the final price up or down.
But the appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money than the property is actually worth.
The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.
Please be sure to come back up on the Porch for a follow up post where I will be writing about the common conflicts that can arise in relation to your North Georgia Mountain appraisal.
11 Comments »
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Very good post Chad, about appraisals and really how important it is to know the value of a home before buying.
It is also important when and if you want to cancel the PMI on your loan. An appraisal is required to determine the value of your property. Many homeowners are clueless about this.
Once you have reached 20% equity in your home by appreciation, improvements made to the home or paying down the principal balance of the mortgage (or any combination of the three), you can force the lender to cancel the private mortgage insurance.
Comment by Port Orange Juice — December 14, 2007 #
Janis,
Thanks so much for your input, commenting on the awareness of PMI and when a home owner can canel that is a very good piece of advice.
Chad
Comment by Chad — December 14, 2007 #
Good work Chad–one last point, appraisals are designed to keep the system honest– it is the check and balance within the system. Terry McDonald
Comment by South Charlotte Real Estate — December 14, 2007 #
Chad- I’m sure many North Georgia sellers will be interested in your upcoming installments on appraisals. Many people don’t understand the ins and outs- you are a great resource!
Comment by Chico CA Real Estate- Sandi Bauman — December 15, 2007 #
Chad - understanding the home appraisal process is something that home buyers and home sellers often have misconceptions about. Thanks for a comprehensive explanation on the process and for being the Blue Ridge Georgia Real Estate consultant - showing it’s about more than just “selling any one house”! - Cyndee Haydon
Comment by Clearwater Beach Condos — December 16, 2007 #
Informative post. It’s the basic stuff that so often gets assumed that everyone knows!
Comment by Diana Blue — December 17, 2007 #
Chad great explanation about the appraisal process. I am sure your local home buyers or sellers will appreciate your detailed post. - Ashley
Comment by Albuquerque NM Real Estate — December 17, 2007 #
Chad - You have hit upon one of the most misunderstood processes when buying a home. Your attention to detail leaves no guesswork.
Comment by Paula — December 18, 2007 #
Chad, you did an excellent job on explaining appraisals and their importance.
I also love your updated blog. Sorry it’s taken so long to get back over here!
Maggie
Comment by Palmetto Bay Redland Real Estate — December 20, 2007 #
Chad- I love your Christmas tree widget! I just stopped by to wish you a very Merry Christmas. See you on the vine!
Comment by Mary De Luca — December 22, 2007 #
Very informative. Under the cost approach what is the current cost per square foot in Blue Ridge, GA?
Comment by jim — February 23, 2008 #