How to Obtain the Best Appraisal of Your House or Condo
A special report from Real Estate Expert Bob Bruss
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It has been almost six years since these special reports revisited the topic of how to obtain an accurate appraisal of your property, especially your house or condominium. As I write this in mid-2006, the residential sales market volume is slowing down in many towns (primarily due to higher home mortgage interest rates). It’s hard to remember, but we have been spoiled for the last 10 years with an abnormally good home sales market. Now we appear to be returning to a more “normal” residential sales market.
This change will require some adjustments by home sellers, buyers, and realty agents. I doubt we will continue to see the high annual home appreciation rates of the last few years (except in a very few communities with high demand and low listings supplies). The National Association of Realtors is predicting an average annual residence appreciation rate in 2006 of about 6%, well below the 10% rate of 2005. However, sales volume continues at a hectic pace in some areas, with multiple purchase offers being received on well-priced home listings.
EXAMPLE: A few weeks ago I enjoyed lunch in San Francisco at Moose’s Restaurant with syndicated real estate newspaper columnist, Dian Hymer. In addition to being an accomplished writer, and author of several home buying books, she is one of the top sales agents with Coldwell Banker in Oakland’s upscale Montclair area. She told me about a house she recently sold which had multiple offers from buyers. The accepted bid was over $200,000 higher than any comparable home sale in the neighborhood. Multiple purchase offers are strong evidence a seller’s market still exists in that very desirable area. Driving home from that lunch, I couldn’t help but think, “I wonder if that house will appraise for a market value $200,000 higher than any recent comparable home sales price in that vicinity.” I sure wouldn’t want to be the mortgage appraiser with that tough assignment.
WHAT IS AN APPRAISAL? Most home buyers, sellers, owners, realty agents, and investors think we know what an appraisal is. Theoretically, it is an expert market value estimate by a trained professional appraiser of the most likely price at which a property will change ownership, with neither the buyer nor seller being under pressure to buy or sell.
Incidentally, only a professional real estate appraiser can prepare an “appraisal.” That’s why a real estate agent who is not also a licensed appraiser cannot legally prepare an appraisal. For this reason, realty agents usually call their estimates of market value a “comparative market analysis” (CMA), or a broker’s opinion, rather that an appraisal.
But the reality is much different. Also, there are different types of professional appraisals, such as “quick sale value,” “as is condition value,” and others. The skill and experience of the appraiser play a key role in the accuracy of an appraisal. However, until there is an actual property sale, an appraisal is just an expert estimate of probable market value.
However, we need appraisals for many purposes, such as when refinancing a mortgage, determining the new “stepped-up basis” to market value for inherited real estate, and for confirming the market value of a recently sold property for mortgage financing.
EXAMPLE: When I refinanced my house in 1999, Chase Manhattan Bank hired licensed appraiser “Gil” who appraised my home’s market value at slightly higher than what I thought it was worth (based on recent sales prices of nearby comparable homes). Then, three weeks later, another mortgage lender sent out a different appraiser who refused to give me his business card (I’m not even sure he was licensed) that came up with an appraisal that was about $75,000 less! Both appraisers had exactly the same information about the house. There was no market value change in the three weeks. Obviously, I didn’t do business with the bank, which sent out that second appraiser.
APPRAISAL IS STILL AN ART, NOT A SCIENCE. Over the last 10 years, there have been many attempts to make real estate appraisals more accurate, especially with computerized versions of appraisals. For homes valued below $250,000, many lenders now use AVMs (Automated Valuation Models), often confirmed by a “drive-by appraisal” where the appraiser doesn’t even inspect the interior of the residence.
EXAMPLE: My first encounter with an AVM was about three years ago when I applied with Wells Fargo for a $75,000 home equity credit line on my second home condominium. The online application form asked for my estimate of market value. I thought I was in touch with the local market, based on recent sales prices of similar nearby condos in the same complex, so I put down $125,000. To my pleasant surprise, a few days later I received a phone call from a Wells Fargo representative informing me I was wrong and my condo was worth at least $150,000 based on their AVM appraisal so I could get a $100,000 home equity credit line instead. The representative told me that because my condo is in a complex of 200+ similar units, they didn’t need to inspect the interior of my unit. AVMs are especially suitable for situations like that where all the residences are relatively similar. But AVMs are usually not appropriate for unique one-of-a-kind homes, or where some homes have been extensively remodeled but other neighborhood homes have not been upgraded.
The latest computerized residential valuation attempt can be found at www.Zillow.com. It is an amazing website where you can enter addresses of 60 million U.S. houses and condos to receive a “zestimate” of that home’s market value based on recent comparable sales prices of neighborhood homes. Although not 100% accurate, it gives property owners, realty agents, and prospective buyers a fairly accurate starting point to determine the fair market value of a residence.
A unique feature of this free website is it shows GPS (global positioning system) aerial views of most properties, including even the lot lines drawn in yellow. My personal residence is on an odd-size lot, but Zillow even shows the boundaries with all the zigs and zags. Zillow says it obtains its information from public records and other sources.
If you want to look at an entire neighborhood from overhead to determine nearby features and drawbacks, an easy free GPS website to use is “Google Earth.” Go to www.Google.com. You can zoom in or out on a specific street address to see what the vicinity looks like from overhead. Although this is not an appraisal website, it is valuable for showing nearby landmarks.
Will computers make professional appraisers obsolete? I don’t think so. Computers have made the work of appraisers much easier, and more accurate, by improving the availability of local property information, which helps determine the appraised value of a property. But there will never be an accurate substitute for an appraiser’s eyes and experience to accurately estimate the market value of a specific property. However, when a “ball park estimate” of a home’s market value is all that is needed, such as in my condo complex example, AVMs and other computerized models will continue to erode the need for full detailed appraisals.
HOW APPRAISERS ARE LICENSED. Since 1989, the federal Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) requires each state to license appraisers for “federally related transactions.” All states now require appraisers to be licensed. More important, most mortgage lenders require appraisals by licensed appraisers, especially for homes valued above $250,000.
When an unlicensed person evaluates a property, such as a real estate sales agent providing a comparative market analysis (CMA), that is not an appraisal but an “opinion of probable market value.” However, sometimes CMAs are more accurate than formal appraisals because sharp realty agents are usually up-to-date on sales price trends whereas appraisers rely on reported information from recent closed sales, which may lag by weeks or even months.
The exact appraisal license requirements vary from state to state. As a very general rule, there are three levels of appraiser licenses: (1) licensed appraiser, (2) state-certified residential appraiser, and (3) state-certified general appraiser.
In addition, there are trainee appraisers who are gaining experience required to take the appraiser license test. A big problem for beginner trainee appraisers is they must have at least 2,000 hours of supervised experience and training with a “mentor” licensed appraiser. Because many experienced appraisers work out of their homes and don’t want to take on the liability and expense to hire a trainee, finding trainee appraisal jobs can be very difficult.
If you are interested in becoming a professional appraiser, a good book to study is How to Get Started in the Real Estate Appraisal Business by Daniel J. Nahorney (McGraw-Hill, New York, 2006, $21.95, available in stock or by special order at local bookstores, public libraries and www.Amazon.com. Most community colleges offer beginner appraisal courses, which are an excellent place to learn about appraisal basics to see if you might enjoy appraisal work.
Effective January 1, 2008, the Appraisal Qualifications Board (AQB) will drastically toughen the experience and education requirements to become an appraiser. To become a certified residential appraiser, a college associate degree or equivalent will be required and to become a certified general appraiser will require a college bachelor’s degree or equivalent. In addition, there are experience requirements.
However, current appraiser licensees will be “grandfathered” so there is a rush to get licensed before the tough new requirements take effect. Special thanks to Ann O’Rourke, MAI, SRA, for the latest license information in her superb monthly newsletter Appraisal Today. More information is available at her website which is www.AppraisalToday.com.
HOW APPRAISERS ARE HIRED. Most professional real estate appraisals involve mortgage financing, either when a residence is purchased or when its mortgage is refinanced. Yes, there are other situations where appraisers are hired, such as when an employee relocation firm needs an appraisal of an employee’s home, or when a homeowner wants an appraisal for estate, inheritance, or other valuation purposes.
Probably 90% of residential appraisers are hired by mortgage lenders who select appraisers in several ways. Local lenders, such as a community bank, usually have a small “approved list” of local appraisers. The big nationwide mortgage lenders, such as Countrywide, Wells Fargo, Bank of America, GMAC, and others, either have their own lists of approved appraisers or the local mortgage origination branch selects appraisers who provide accurate, fast, and reasonably-priced appraisals. Out-of-area lenders often use Appraisal Management Companies (AMC) who can arrange local appraisals in virtually any area. Most appraisal assignments now come into the appraiser’s office by e-mail. When the appraisal is completed, it is usually sent to the lender by e-mail in a PDF.
If a home to be appraised is in a subdivision where all the residences are relatively similar, virtually any professional appraiser can usually do an accurate job. However, when a home is unique in an area where the homes are vastly different, to obtain an accurate appraisal you want an appraiser who is experienced in that vicinity. That is the first step to obtaining an accurate appraisal – be sure the appraiser is experienced for that area. Out-of-area appraisers are notorious for poor quality appraisals, usually because they are not familiar with the community.
EXAMPLE: Last summer I refinanced my home mortgage with Wells Fargo. After the loan was approved, the next step was the appraisal. The out-of-town loan agent in Las Vegas was not familiar with my community so he asked if I had any preference for a local appraiser. After checking with several local Realtors who sell homes in my area, I found there was no consensus as to the best appraiser. So the loan agent phoned the local Wells Fargo Mortgage branch to find out which appraisers they recommend. The loan agent selected an appraiser whose office is about 20 miles away from my home. But she was very experienced appraising one-of-a-kind houses in my town and did an excellent job. In fact, although most lenders require only three comparable recent home sales prices to justify an appraisal, she included five! Also, her market value estimate was slightly higher than I estimated. She had several very recent comparable home sales prices of which I was not aware. And she completed the appraisal in three days! Needless to say, when someone asks me to recommend an appraiser in my community, I suggest her name.
WHAT TO EXPECT IN YOUR APPRAISAL REPORT. Appraisers use three basic “approaches” to arrive at their professional appraisal of a property’s market value. Not all methods are appropriate for each property. But in some situations, all three approaches are used.
1 – REPLACEMENT COST APPROACH. This appraisal method usually involves multiplying the square footage of the structure by the current construction cost for comparable quality to arrive at the estimated replacement cost of a building. When using this method, the key to success is starting with an accurate source of current local construction costs, such as nearby home builders, Marshall & Swift online cost services at www.marshallswift.com, and the Bluebook at www.bluebook.net.
The next step, probably the most difficult for an appraiser, is to estimate applicable depreciation for an older structure to arrive at a reasonable replacement cost estimate. The land value, based on cost per square foot, is then added to arrive at the property’s total market value.
Insurance agents often use the replacement cost approach to arrive at recommended replacement cost insurance coverage for houses. Although used as a cross-check, most appraisers and mortgage lenders don’t pay much attention to the replacement cost approach for all but newer residences.
2 – RENTAL INCOME APPROACH. This appraisal method is most appropriate for rental income property, such as apartment buildings, shopping centers, office buildings, warehouses, and other rental structures. If the property is owner-occupied, such as a warehouse, then rents for equivalent nearby rental property are used with this approach.
The net income, minus a vacancy estimate, is capitalized (based on the local capitalization rates for recent sales of similar income properties) to determine the estimated market value of the subject property. Appraisals of single-family houses and condos do not usually include this method unless the neighborhood is primarily occupied by tenants rather than owner-occupants. Even when a house is used as a rental, this is usually not the best appraisal method because the market value of most residences is determined by recent sales prices of comparable nearby houses, not their rental income.
3 – COMPARABLE SALES PRICE APPROACH. This is the most important appraisal method to determine the market value of a house or condo. To be accurate, the sales prices of comparable nearby residences should be as recent as possible. Sales prices more than six months old are usually not used unless there have not been any more recent home sales in the vicinity. In a rising or falling market, comparable closed home sales within the last three months are preferred.
Because this is the most important appraisal approach for houses and condos, the experience of the appraiser becomes critical to determine what is a truly comparable similar nearby residence. However, adjustments must usually be made to both the “subject property” being appraised when comparing it with the comparable nearby home sales, and to the comparables, to compensate for the pros and cons of each residence.
To illustrate, if the subject home has three bedrooms, but all the recent “comps” have four bedrooms, the appraiser must subtract value for the lack of a fourth bedroom. But if the subject property has a family room and the comps lack family rooms, then the appraiser will add value to the subject property.
The critical part of the appraisal process is the appraiser’s addition or subtraction of value, often involving thousands of dollars, based on his or her expert valuation judgments. Square footage of the subject property and the comps also play a big role because the appraiser usually has not seen the interior of the comparable properties.
FIVE STEPS TO GET THE BEST POSSIBLE APPRAISAL OF YOUR HOME. Just as there are good and bad lawyers, dentists, physicians, and other professionals, there are good and bad appraisers. Fortunately, the bad appraisers usually don’t last long because mortgage lenders won’t give them assignments if their appraisals are deficient. To maximize the probability of obtaining the best possible appraisal of your residence’s true market value, here are the five key steps:
1 – GET YOUR HOME INTO ITS BEST POSSIBLE CONDITION. If you are buying a house or condo, this step might be beyond your control. But the seller and the real estate agent should do everything possible to make the residence show its best when the appraiser visits. Cleaning, repairing, and painting can work wonders to increase estimated market value. The condition of the interior and the landscaping can add (or subtract) thousands of dollars in estimated market value. Aim to get everything into near “model home” condition.
The appraiser will take photographs of the exterior of the residence, front and back. “Street scene” photos are also required by the standard residential appraisal form. Many lenders now ask their appraisers to take interior photos. If you object to having your home photographed inside, perhaps because you have valuable antiques or other furnishings, which have nothing to do with the structure’s market value, you don’t have to allow interior photos. But most lenders want interior photos so don’t deny permission without a good reason.
2 – ALWAYS ACCOMPANY THE APPRAISER; ASK FOR A BUSINESS CARD. You or your real estate agent should accompany the appraiser to be available to answer questions. It should not be a hostile confrontation so be extremely friendly. Be sure to ask, up front, for the appraiser’s business card. Most will gladly give it to you (because appraisers depend on referrals for future business).
Consider it a bad sign if the appraiser says, “I forgot my business cards” or something like that. It’s possible you might be speaking to an unlicensed trainee. Although some lower-priced homes can be appraised by non-licensees, it is not a good sign.
I can only recall two appraisers who didn’t offer me their business cards, or who refused to give me their card when I asked. Both appraisals turned out to be of poor quality and I didn’t do business with their lenders. Would you do business with an attorney, physician, real estate agent, dentist, or other professional who wouldn’t give you their business card? I hope not.
3 – PREPARE A WRITTEN LIST OF THE HOME’S FEATURES TO HAND TO THE APPRAISER. Busy appraisers might inspect three to six homes per day. Although they take notes on their appraisal forms, and the photos help jog their memory, even the best appraisers can’t remember all the details of each residence. That’s why it is so critical to hand the appraiser a list of the home’s special features. If you are buying a house or condo and have a copy of the listing agent’s feature sheet, you can be sure it will highlight the best features of that home.
Don’t be shy about stating the sales price and/or your estimate of your home’s market value. However, be realistic when estimating market value and be sure it is based on recent sales (not asking) prices of nearby comparable homes. Although some appraisers say they resent it when the mortgage lender, home seller, home owner, or realty agent tell them to “hit the mark” and come up with an appraised value close to the stated amount, in a nice way let the appraiser know what you think the residence is worth. But don’t be pushy.
Savvy appraisers know if their appraisal is far off the sales price or the homeowner’s estimated market value, they will have unhappy clients and the lender might never hire them again. However, honest appraisers won’t over-value a home, so don’t expect miracles.
4 – GIVE YOUR APPRAISER A LIST OF RECENT NEARBY COMPARABLE HOME SALES PRICES. The best appraisers welcome information you or a real estate agent hands them about comparable nearby home sales prices within the last six months. Your goal is to make the appraiser’s job as easy as possible.
However, be sure the “comps” are closed sales, not pending sales or sales you heard about through the neighborhood gossip grapevine. The appraiser will verify the information, but it helps if you can guide the appraiser so he or she won’t overlook any important recent nearby home sales.
If the appraisal involves a house or condo sale, the real estate agent should provide detailed comparable sales prices to the appraiser. My friend Larry Emerson, a realty broker with RE/MAX in Colorado Springs says “I practically do the appraisal for the appraiser.” That’s why Larry’s home buyers usually have no trouble obtaining the mortgages they need.
Beware of any appraiser who refuses to accept your neatly prepared list of nearby comparable home sales prices. That could be a warning sign the appraiser has been instructed by the mortgage lender to “low ball” your appraisal, or to estimate a below-market “quick sale” valuation, especially if home sale prices in the vicinity are declining.
5 – INSIST YOUR LENDER PROMPTLY PROVIDE YOU WITH A COPY OF THE APPRAISAL SO YOU CAN REVIEW IT. When you are buying a home, or refinancing your mortgage, even if you are paying for the appraisal, the appraiser’s “client” is the lender. I realize that is a bunch of nonsense, but that’s what the appraisal rules say. Be sure your mortgage lender agrees in advance to mail or fax you a copy of the appraisal as soon as the lender receives it from the appraiser.
When you receive a copy of the appraisal from the lender (NOT from the appraiser unless you are dealing direct with the appraiser, perhaps for estate valuation purposes), be sure to immediately read it to be certain the appraiser didn’t make any obvious mistakes, which have an adverse influence on the home’s appraised valuation. You might disagree with the amounts the appraiser added or subtracted for the pros and cons of the “comp” residences as compared to yours.
More important, if the appraiser made a mistake about your home’s features, such as showing your home has three bedrooms when you actually have four bedrooms, be sure to notify the lender and the appraiser immediately. Also, check the appraiser’s computation of your home’s square footage to be sure it is accurate.
If you disagree with the appraised valuation, and if you have facts (not just opinions) to back you up, don’t hesitate to complain in a nice way. Unless it is an obvious information error, such as incorrect square footage, ask the lender to have a review appraisal made, or request a second appraisal (at the lender’s expense) by another appraiser.
In the rare event the appraiser made a factual error, such as under-reporting your home’s square footage, and refuses to correct it, report the matter to your state real estate appraisal license administrator for possible discipline. However, please be aware most state appraisal license boards are run by appraisers.
While they are anxious to discipline truly bad or dishonest appraisers, many of whom have been sent to jail for mortgage fraud, these appraiser license boards are not eager to discipline appraisers over minor technical matters. A major reason is these boards depend on the appraiser license fees collected and, in many states, the number of licensed appraisers has been declining recently.
SUMMARY. Obtaining an accurate appraisal of your residence or other property really isn’t difficult if you know the procedures explained in this special report. Because appraisal is clearly an art, not a science, reasonable minds can and will differ. To prevent appraisal mistakes, home buyers, sellers, owners, and realty agents must be involved in the appraisal process by providing the appraiser with as much factual written information as possible to assure an accurate appraisal.
If you are not satisfied with the appraisal, after reviewing it for factual errors, don’t hesitate to point out any mistakes. However, please understand appraisers can become very defensive when criticized. Stick to the facts, not your opinions. If your appraiser made an error but refuses to correct it, don’t hesitate to (a) ask the lender for a review or second appraisal, (b) refund of your appraisal fee if you paid for the appraisal, and (c) file a complaint about the appraiser with your state appraisal license officials.
ENTIRE CONTENTS COPYRIGHT 2006 BY ROBERT J. BRUSS
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