What is Real Estate Appraisal?

Real estate appraisal, known also as property valuation or property evaluation, is the process of developing an opinion of value for real property, usually for a fee.

The key benefits of real estate appraisal are:

To determine the market value of a property for sale or financing purposes banks require market analysis. Real estate appraisals known also as appraisal reports are not the same as home inspections and they help buyers, sellers, and lenders understand what a property is worth in the current real estate market. This allows properties to be fairly valued for sales and financing transactions.

To assess property condition and identify any repairs needed. Appraisers, who do not work for the bank, but are hired by the bank thoroughly inspect the interior and exterior of a home to note any maintenance issues or defects. This provides buyers with an objective report on the property’s physical condition which is linked to the value of the property, this process is called Estimation Assessment.

To estimate insurance value for coverage purposes. Appraised values play a role in determining adequate property insurance levels for homes. Higher appraised values generally warrant higher dwelling coverage limits.

In contrast to a home inspection, a real estate appraisal focuses solely on determining a property’s market value rather than evaluating physical condition.

While appraisers will note any glaring defects, home inspections involve a more rigorous assessment of maintenance needs, systems functionality, safety issues, and code compliance. The main difference is appraisals estimate value while inspections evaluate physical integrity. Other differences include the level of detail provided, the testing of systems and appliances, and the checking for environmental hazards in the inspection process.

George Nicola
George Nicola

George is a seasoned interior designer and property marketing strategist with over 13 years of experience. He specializes in transforming properties into visually stunning spaces, helping clients recognize the potential and beauty in each property. With an impressive international client base of exciting projects throughout Europe and America.

TL;DR

Real estate appraisals are an essential part of the home buying and selling process. They are used to determine the value of a property and ensure that the amount of money being loaned is not more than the property is worth. Appraisals also provide reassurance to buyers that the price they are paying for a property is fair and accurate according to its property characteristics analysis (size, condition, amenities) as a result being a fair market value determination.

There are three main types of real estate appraisals:

  • the sales comparison approach (comps)
  • the cost approach
  • the income approach.

The sales comparison approach is the most common also known as comps (comparable properties), and it compares the property being appraised to similar properties (5 to 6 real estate samples) that have recently sold in the same area, if possible within 1 mile radius. The cost approach is used for new or unique properties and calculates the cost of rebuilding the property from scratch. The income approach is used for commercial properties and calculates the value of the property based on the income it generates.

During a real estate appraisal, the appraiser will typically take into account several factors including the property’s location, size, condition, and any recent renovations or upgrades. They may also consider the local real estate market and any external factors that may impact the value of the property.

It’s important to note that real estate appraisals are not the same as home inspections. While a home inspection is used to identify any potential issues with the property, an appraisal is used to determine the value of the property.

Understanding the different types of real estate appraisals and how they work can be helpful for both buyers and sellers.

By knowing what factors are taken into consideration during an appraisal, buyers can make informed decisions about the properties they are interested in purchasing. Sellers can also use this information to ensure that their property is priced accurately and competitively.

Can home seller influence the appraisal?

No, a home seller should not try to improperly influence an appraisal. Appraisals are meant to be unbiased opinions of market value from an independent, third-party professional.

However, there are legitimate ways a home seller can aim to maximize appraisal value:

  • Price the home competitively based on comps and the advice of real estate agents. Reasonable pricing in line with the market naturally helps appraisal value.
  • Prepare the home by making any needed repairs, fresh paint, landscaping, and cleanliness. A well-maintained home shows buyers the property has been cared for and often appraises better.
  • Time the appraisal well by having showings first and making any fixes buyers request. Let the home receive some market exposure before being appraised.
  • Allow legal home improvements like added living space or upgraded systems that bring tangible value. Permitted additions can boost appraisals when done properly.
  • Provide full property details to the appraiser about improvements, new systems/fixtures, or value added remodels.

While appraisal results cannot be guaranteed or rigged, smart preparation and legitimately enhancing saleability and marketability can lend themselves to maximized valuations.

But ultimately the qualified appraiser decides the value based on their professional comparables analysis and inspection.

What can affect negatively a house evaluation?

Physical issues, repairs needed, loss in utility, and external influences that hurt buyer demand or require price adjustments – all contribute to reduced values that get reflected in appraisals and closed sales data relied upon by appraisers.

An appraisal positively considers recent renovations which increase market value. Updates like new bathrooms and kitchens allow for higher adjusted comparable sale values which boosts the overall appraisal.

And since property taxes are based on assessed values influenced by a home’s market value, a higher appraised value raises those tax obligations. Proper maintenance and renovations offset external and physical depreciation – resulting in improved marketability and maximized appraisals.

Here are some things that can negatively affect a house’s appraisal value:

  1. Water damage in kitchen reduces appraised value. Water damage lowers desirability, functionality, and can indicate larger issues for buyers.
  2. Major Mechanical Issues – Faulty electrical, failing roof, old furnace, structural problems require expensive repairs that get reflected in lower sales prices and appraisals. Buyers discount value based on repair costs.
  3. External Obsolescence – Changes surrounding the home like new commercial development, highway expansions, power line installation can negatively impact livability, ambiance and marketability. Values decline.
  4. Outdated Finishes – Homes not updated in decades with outdated kitchens, bathrooms, flooring and lacking features buyers want will sell for less and have reduced appraisals compared to the competition.
  5. Smaller square footage compared to recent sold homes used for comps can mean a lower valuation. Limited size and smaller layouts hurt appraisal outcomes.
  6. External obsolescence from factors like commercial encroachment, excessive highway noise, powerlines can also bring values down through appraisal adjustments.

Other factors contributing to decreased house prices are:

Location & Neighborhood:

  • High crime rates or safety concerns
  • Proximity to undesirable features: Noise pollution, industrial areas, landfills
  • Limited access to amenities: Schools, transportation, shopping
  • Poor-quality construction or infrastructure in the area
  • Declining property values in the neighborhood

Market Conditions:

  • Economic downturn or recession
  • Rising interest rates
  • Oversupply of similar properties
  • Short market listing time
  • Unrealistic seller expectations

Other:

  • Unpleasant odors or fumes
  • Significant property line disputes
  • Historical events or stigmatization related to the property
  • Environmental hazards or contamination
  • Illegal additions or modifications

Remember: This list is not exhaustive, and the specific factors affecting a house price vary depending on the individual property, location, and market conditions. Consulting a real estate professional can provide a more accurate assessment for your specific case.

Property Appraisal Best Practices for Sellers

Preparing the home exceptionally well and expressing your own comparables research helps sellers demonstrate reasonable pricing in line with market realities – boosting appraisal success.

An illustration of a man standing in front of a house, representing the process of real estate appraisal.
An illustration of a man standing in front of a house, representing the process of real estate appraisal.

Before the Appraisal:

  • Address known issues: Fix any obvious structural problems, leaks, or cosmetic flaws.
  • Enhance curb appeal: Improve landscaping, clean walkways and exteriors, and increase street presence.
  • Declutter and clean: Eliminate clutter, deep clean all areas, and make the property smell fresh and inviting.
  • Highlight upgrades and improvements: Make sure the appraiser is aware of recent renovations, new appliances, or energy-efficient features.
  • Gather documentation: Compile relevant documents like permits, warranties, receipts for upgrades, and property tax records.
  • Communicate openly with the appraiser: Provide any information that might affect the valuation, like unique features or neighborhood amenities.

During the Appraisal:

  • Be present and courteous: Answer the appraiser’s questions honestly and provide any requested information.
  • Point out key features: Showcase unique selling points like spacious rooms, natural light, or energy-saving measures.
  • Avoid emotional attachment: Stick to facts and avoid expressing sentimental value or unrealistic expectations.
  • Respect the appraiser’s professionalism: Do not pressure or influence their opinion.

Additional Tips:

  • Consider pre-listing inspections: Identify and address potential problems beforehand to avoid surprises during the appraisal.
  • Market your property competitively: Price your property realistically based on comparable sales and current market conditions.
  • Negotiate effectively: Understand the appraisal report and its reasoning to support your negotiations with potential buyers.

Remember:

  • Appraisals are professional opinions, not guarantees of sale price.
  • While presentation and maintenance can influence value, market conditions and comparable sales ultimately have the biggest impact.
  • Working with a professional realtor can provide valuable guidance and expertise throughout the selling process.

Does Appraisers has qualifications?

Yes, real estate appraisers and appraisal firms typically have qualifications that are necessary to perform their duties. Appraiser’s experience contributes to accuracy of the appraisal.

Appraisers must meet minimum education, experience, and licensing requirements to perform real estate appraisals. Here are some key qualifications:

Education:

  • Bachelor’s degree or higher qualifies for Certified Residential appraiser
  • Associate’s degree qualifies for Licensed Residential appraiser
  • Specific appraisal coursework is also required

Experience:

  • Certified Residential requires 2,500 hours of appraisal fieldwork over 24 months
  • Licensed Residential requires 2,000 hours over 12 months

Licensing:

  • Must pass national certification exams
  • Obtain state licensing after meeting education and experience thresholds
  • Requirements vary slightly between states

Appraisers must understand property valuation methods, know how to identify comparable properties, inspect homes, use appraisal software, and apply the Uniform Standards of Professional Appraisal Practice (USPAP) adopted as a standards guide in 1989 by the US Congress.

Ongoing professional development is also essential. Most states require 14 hours per year of continuing education to renew appraisal licenses.

Formal training, extensive on-the-job hours, regulatory exams, licensing, and staying current through ongoing education are vital qualifications for reputable real estate appraisers. These requirements ensure appraisers have robust competencies to perform independent, impartial, and competent valuations.

What are the appraisal regulations?

By following federal, state, and professional appraisal regulations, appraisers produce trusted property valuations and ethical, unbiased analysis. The regulatory framework protects the public interest.

Here are some of the key real estate appraisal regulations:

  1. Uniform Standards of Professional Appraisal Practice (USPAP) – Published by The Appraisal Foundation, these are the main standards that provide appraisers rules to follow for ethical behavior and professional methodology. Adherence is required in most cases.
  2. State Appraiser Certification and Licensing – Each state has an appraiser regulatory board that oversees licensing, certification, education, and discipline. Appraisers must meet experience, exam, fee, and renewal requirements to be authorized to practice in a state.
  3. FIRREA – The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) set federal requirements for appraisals for federally-related transactions. This led to increased professionalism standards starting in the early 1990s.
  4. Interagency Appraisal Guidelines – Federal mortgage regulators provide guidance on when appraisal reviews, field reviews, or evaluations may be acceptable alternatives to full appraisals. But full appraisals are still generally required.
  5. USPAP Course Mandate – Appraisers must complete a 7-hour USPAP update course every two years as part of continuing education for license renewal. This USPAP training is mandatory.
  6. Appraisal Independence Requirements (AIR) – Added after the mid 2000s housing crisis, the AIR rules prohibit coercion or undue influence of appraisers that could negatively impact opinions of market value.

Types of Real Estate Appraisals

Q: Are real estate appraisals important?

Yes, real estate appraisals play a very important role in the housing market and lending transactions. Some key reasons why appraisals are important include:

  1. Appraisals protect buyers by helping ensure they don’t overpay for properties. Without appraisals, there would be increased risk of properties selling above actual market value. Appraisals benchmark value to recently sold comparable properties.
  2. Appraisals safeguard lenders by verifying collateral value for mortgages and loans. This minimizes risk for banks and mortgage lenders when providing financing. Loans depend on the property securing the debt having adequate equity and marketability.
  3. Appraisals inform insurable values for setting appropriate insurance coverage on real estate assets. This ensures properties have proper protection.
  4. Appraisals provide objective and unbiased valuations. As third-party opinions of value, they are free of conflicts of interest inherent in transactions. All parties involved can rely on appraisals as fair market valuations.
  5. Appraisals are often required in judicial proceedings related to property disputes, claims, and planning or zoning matters. They offer expert opinions on real estate values.

Micro-location analysis in the context of real estate appraisal involves evaluating a property’s specific location within a larger area. This analysis considers factors such as nearby amenities, transportation access, neighboring properties, and local market trends.

By focusing on these detailed aspects, appraisers can provide a more precise valuation of the property based on its micro-location characteristics.

This approach helps to capture the unique attributes and influences that can impact the property’s value within its immediate surroundings.

Estimation assessment refers to the process of evaluating or appraising the accuracy and reliability of an estimation or forecast. This can involve reviewing the methods, data, and assumptions used to make the estimation in order to determine its validity and potential margin of error. In various fields such as real estate, project management, finance, and statistics, estimation assessment is crucial for making informed decisions based on the quality of the estimations provided.

In the context of real estate appraisals, a lender refers to an individual or an institution that provides financing for the purchase or refinancing of a property. Lenders may include banks, credit unions, mortgage companies, or other financial entities that offer loans to borrowers.

In the appraisal process, the lender typically requires an independent appraisal of the property to assess its value as part of the loan approval process.

The appraisal helps the lender ensure that the property provides adequate collateral for the loan amount being requested by the borrower.

Comparative Market Analysis

Comparative Market Analysis (CMA) is a type of real estate appraisal methodology that compares the property being appraised to similar properties that have recently sold in the same area. This type of appraisal is commonly used by real estate agents to help determine a property’s value. A CMA takes into account various factors such as property size, location, age, and condition.

Both CMAs and appraisal comps analyze similar recently sold properties but the Comparative Market Analysis (CMA) and comps are not the same. The key differences are:

Comps:

  • Used by appraisers in appraisal reports to value a property
  • Typically 3-5 recently sold comparable properties
  • Involves detailed adjustment of comps to subject property
  • Part of an impartial, third-party opinion of value

CMA:

  • Created by real estate agents to price a listing
  • Typically 10-15 active and pending comparable listings
  • Less rigorous adjustment than appraisal comps
  • Part of sales and marketing process to establish listing price

Comps support unbiased appraisal valuations while CMAs are used by listing agents and brokers to aid pricing and help selling the real estate listings. Appraisers also make more intricate adjustments between comparable sales and the subject property. So while CMAs and comps both benchmark value based on market data, they serve different roles in the real estate transaction process.

Sales Comparison Approach

The Sales Comparison Approach involves analyzing recent sales of comparable properties to determine the market value of the subject property. This approach relies on making adjustments to the comparable sales based on differences compared to the property being appraised.

To implement the Sales Comparison Approach, the appraiser follows several key steps:

  1. Research and verify details on at least three recent sales of similar homes in the same area. Comparables should be as alike as possible in size, condition, features, location, and other factors.
  2. Make appropriate adjustments for any differences between each comparable sale and the subject property. For example, adjust for date of sale, square footage, upgrades or remodeling, lot size, etc. The goal is to quantify how much more or less each comp would likely sell for if identical to the property being appraised.
  3. Reconcile the adjusted values for the comp sales into a value conclusion for the subject home. The appraiser analyzes the range in adjusted values of comps and determines an appropriate market value for the appraised home based on this sales comparison analysis.

When applied properly with good quality comparable sales requiring minimal adjustments, the Sales Comparison Approach leads to a very reliable opinion of market value, which represents the amount a typical buyer would pay for the subject property.

This data-driven approach provides strong supporting evidence of value based on real-world market transactions, which complements other appraisal techniques like the Cost Approach and Income Approach.

Cost Approach

The Cost Approach is another methodology appraisers utilize to value real estate. This method encompasses estimating the value of the land the home sits on and adding the depreciated replacement cost of the improvements and structures.

More specifically:

  1. Determine land value through the sales comparison approach, comparing similar vacant plots that have sold recently. Make adjustments just like with improved properties.
  2. Estimate replacement cost new of the home’s improvements by factoring in prevailing construction costs per square foot and any special features.
  3. Calculate and subtract all applicable forms of depreciation – physical, functional, and external. This adjusted cost when added to estimated land value indicates the property’s market value via the cost approach.

The Cost Approach calculation relies on the principle that a rational buyer wouldn’t pay more to purchase a property than it would cost to buy land and construct an equivalent structure.

While useful in new construction, this approach works best as a secondary method for unique properties where there is inadequate sales data. It depends heavily on current cost tables and depreciation estimates.

Income Approach

The Income Approach is the third main valuation method in the appraisal process. This approach converts future cash flows from a property into a present value.

The key steps include:

  1. Estimate the subject property’s potential gross income if it were fully rented at market rates. Factor in vacancy rates and operating expenses to arrive at an effective gross income.
  2. Calculate the property’s net operating income by subtracting operating expenses like insurance, Utilities, HOA fees, management costs and reserves for replacement from the effective gross income.
  3. Determine an appropriate capitalization rate based on rates investors use to value similar investment properties. Apply the capitalization rate to net operating income to estimate property value.
  4. Optionally calculate the net cash flow over a set holding period plus expected sales price upon selling (reversion). Discount these cash flows into a present value for another perspective on value via discounted cash flow analysis.

The income capitalization calculations provide an indication of property value based on its income-generating ability as an investment. Income producing commercial properties like apartments, offices, malls and warehouses are valued primarily using the income approach rather than the sales comparison method typically applied to residential appraisals.

What are the appraisal requirements?

The main requirements for a real estate appraisal include:

  1. Inspection – The appraiser must fully inspect the interior and exterior of the home to observe the physical condition, layout, size, improvements, and other features.
  2. Comparable Properties – The appraiser researches, verifies, and analyzes at least three comparable recent sales of similar nearby homes to help determine value. Adjustments are made for any differences compared to the subject home.
  3. Property condition – Age, Maintenance history, Upgrades, Structural integrity.
  4. Location – School district, Crime rates, Amenities, Proximity to transportation
  5. Valuation – The appraiser develops an opinion on the market value of the property using commonly accepted appraisal methods like the sales comparison approach, cost approach, and income approach. The methods involve careful analysis of market data.
  6. Appraisal Report – Documenting research, valuation calculations, observations, photos, and conclusions in a detailed report that conforms to industry standards. Common reporting options include Self Contained, Summary, and Restricted Use reports.
  7. Inspection Photos – Clear, well documented interior and exterior photos of the property showing all major rooms, systems, defects noted, improvements, yard, etc.
  8. Certification – The report must be completed and certified by a state licensed or certified real estate appraiser in good standing.

Following these industry norms and regulatory requirements results in an independent, supported opinion of property value to be relied upon by all parties in a real estate transaction.

The Appraisal Process

Real estate appraisals are an important part of the home buying and selling process. They help determine the market value of a property, which is used to set the listing price, obtain financing, and make investment decisions. The appraisal process typically involves four main steps: preparation and research, physical inspection, comparables selection, and reconciliation and final appraisal report.

Preparation and Research

Before conducting an appraisal, the appraiser must gather information about the property and the local real estate market. This includes researching public records, such as property deeds and tax assessments, as well as gathering information about recent sales of similar properties in the area. The appraiser will also consider factors such as the property’s location, size, age, condition, and any unique features.

Physical Inspection

The next step in the appraisal process is to conduct a physical inspection of the property. During this step, the appraiser will visit the property to assess its condition and take measurements. The appraiser will also take note of any upgrades or renovations that have been made to the property. This step is important because it allows the appraiser to get a firsthand look at the property and identify any issues that may affect its value.

Comparables Selection

After completing the physical inspection, the appraiser will select comparable properties that have recently sold in the area. These properties should be similar in size, age, condition, and location to the subject property. The appraiser will then compare the subject property to these comparable properties to determine its market value.

Reconciliation and Final Appraisal Report

The final step in the appraisal process is to reconcile the data gathered during the previous steps and prepare a final appraisal report with appraisal software tools.

This report will include the appraiser’s estimate of the property’s market value, as well as a detailed explanation of how the appraiser arrived at this estimate. The report will also include information about the comparable properties used in the appraisal, Date of appraisal, Type of appraisal, Appraised value, Property characteristics (size, location, condition), and any other relevant information that may have affected the appraiser’s valuation and the appraisal accuracy.

In some appraisal reports Unique property features, Environmental hazards, Historical significance are also included.

The appraisal process is a thorough and objective evaluation of a property’s value. By following these steps, appraisers are able to provide accurate and reliable estimates of a property’s market value.

Are there appraisal market trends?

Yes, real estate appraisal values and practices do reflect market trends and cycles. Some notable examples of how appraisals are impacted by market fluctuation include:

  1. Appreciating Markets – In hot seller’s markets with surging sales prices and bidding wars, appraised values often lag due to reliance on recent closed sales. Rapid appreciation causes challenges with appraisals aligned to current values.
  2. Declining Markets – In buyer’s markets or housing downturns, appraisals tend to be more conservative and reflective of weakening prices and fewer sales transactions available for comparable analysis.
  3. Refinancing Volume – When rates drop and refinances escalate, appraisers handle higher order volume. Delivery times, market coverage, and fees are impacted by spikes in demand.
  4. New Technologies – Automated valuation models (AVMs), drones, mobile apps and data analytics shape aspects of the appraisal process over time as technology evolves. But human oversight remains imperative.
  5. Evolving Compliance – Regulations and requirements for appraiser licensing, production, certified reviews, and independence rules change as government oversight and mortgage lending guidelines shift.

While foundational valuation methodology persists over decades, appraisers must adapt valuation opinions, processes, reporting, and technology integration to align with market trends as they ebb and flow over time.

A man and woman standing in front of a house during a real estate appraisal process.
A man and woman standing in front of a house during a real estate appraisal process.

Factors Affecting Appraisal Value

Real estate appraisals are an essential part of buying and selling property. Appraisals help determine the market value of a property, which is the price a buyer is willing to pay and the seller is willing to accept. Several factors affect appraisal value, including market conditions, property location, property condition, and upgrades and improvements.

Market Conditions

Market conditions play a crucial role in determining appraisal value. Supply and demand, interest rates, and the economy all affect the real estate market. When demand is high and inventory is low, prices tend to increase, resulting in a higher appraisal value. Conversely, when demand is low and inventory is high, prices tend to decrease, resulting in a lower appraisal value.

Property Location

The location of a property is another critical factor in determining appraisal value. Factors such as proximity to schools, shopping, and transportation, neighborhood safety, and overall desirability all affect the value of a property. Properties located in desirable neighborhoods tend to have higher appraisal values, while properties located in less desirable neighborhoods tend to have lower appraisal values.

Property Condition

The condition of a property is another factor that affects appraisal value. Appraisers consider the age, size, and overall condition of the property when determining its value. Properties that are well-maintained, clean, and in good condition tend to have higher appraisal values, while properties that are in poor condition tend to have lower appraisal values.

Upgrades and Improvements

Upgrades and improvements made to a property can also affect its appraisal value. Appraisers consider the age and condition of the property’s systems and features, such as the roof, HVAC, plumbing, and electrical systems. Upgrades and improvements made to these systems can increase the property’s value. Similarly, upgrades and improvements made to features such as kitchens, bathrooms, and flooring can also increase a property’s appraisal value.

Several factors affect appraisal value, and it is essential to understand these factors when buying or selling a property. By understanding these factors, buyers and sellers can make informed decisions about the value of a property.

Selling worst house on best street?

If selling the worst house on the best street, the property’s appraised value will be impacted in a few key ways:

  1. Comps Analysis – The appraiser will need to select comps on the same highly desirable street or neighborhood. Superior location will keep values elevated even if other homes are updated or renovated.
  2. Condition Adjustments – Significant downward adjustments to comps will be made to account for the inferior interior condition, finishes, and maintenance issues compared to the subject home.
  3. Marketing Time – Appreciating markets may offset condition challenges. But additional marketing time is likely still required due to property condition being worst on street.
  4. Intended Use Influence – Refinance appraisals may have more flexibility than purchases requiring bank financing approval. Intended use affects leniency.
  5. Scope of Work Matters – Appraisers can perform different levels of analysis depending on intended use. So condition issues may not always be fully reflected.

While location lifts values substantially, significant offsets to account for inferior attributes still dampen appraised values for the lowest-quality homes relative to the neighborhood. Marketing times also lengthen due to lower curb appeal and property condition.

An appraisal of a street lined with houses and flowers.
An appraisal of a street lined with houses and flowers.

Using Appraisals in Real Estate Transactions

Real estate appraisals are an essential part of any real estate transaction. They are used to determine the value of a property and to ensure that the price being paid for the property is fair and reasonable. There are several ways in which appraisals are used in real estate transactions.

Buyer and Seller Perspectives

From the buyer’s perspective, an appraisal can be used to determine whether the price being asked for a property is reasonable. If the appraised value of the property is lower than the asking price, the buyer may be able to negotiate a lower price. From the seller’s perspective, an appraisal can be used to justify the asking price and to demonstrate that the property is worth the price being asked.

Loan Underwriting

Appraisals are also used in loan underwriting. Lenders require an appraisal to ensure that the property being used as collateral for the loan is worth the amount being borrowed. If the appraised value of the property is lower than the loan amount, the lender may not be willing to lend the full amount.

Property Tax Assessment

Appraisals are also used in property tax assessment. Local governments use appraisals to determine the value of a property for tax purposes. If the appraised value of the property is higher than the assessed value, the property owner may be required to pay more in property taxes.

Appraisals are an important part of any real estate transaction. They are used to determine the value of a property and to ensure that the price being paid for the property is fair and reasonable. Appraisals are used from both the buyer’s and seller’s perspectives, as well as in loan underwriting and property tax assessment.

Does Interest rates affect appraisal reports?

Appraisers make adjustments, but tighter credit and reduced buying power associated with rising rates place downward pressure on real estate valuations over time across price points.

Yes, interest rates do have an effect on real estate appraisal valuations and reporting. Some of the key ways that rates impact appraisals include:

  1. Sales Activity – Rising interest rates tend to dampen buyer demand, reduce sales velocity, and lead to stagnating prices over time. This can make finding recent comparable sales more difficult for the appraiser. Fewer closed comps with wider date ranges may be prevalent.
  2. Expanding Date Ranges – Due to less market activity in a rising rate environment, appraisers often have to reach back further than the typical 3-6 month range for comparable closed sales. Expanding date ranges requires additional market condition adjustments.
  3. Value Trends – Though there is typically a lagging effect, eventually softening demand from higher rates does get reflected in slowing home value appreciation over a period of months. Appraised values pick up on this trend.
  4. Intended Use – Interest rates directly impact loan qualifications and lending appetite. So appraisal uses tied to purchases and financing are most affected versus other needs like property taxes, estate planning, etc.

Are there different appraisals for Loan application, Refinancing, Estate planning

Yes, the intended use does influence the type of appraisal performed and reporting options selected. Here are some key ways appraisals differ across common uses:

Loan Applications:

  • Typically requires 1004/70 form “Self Contained” appraisal report
  • Very detailed with full comparable sales written analysis
  • Extensive interior and exterior inspection photos expected
  • Conforms strictly to bank appraisal guidelines

Refinancing:

  • Often permits shorter “Summary” 2055 reporting form
  • Less detail on qualitative factors about the subject property
  • Requires fewer photos and exhibits documenting condition
  • Desktop or exterior-only appraisals may suffice in some cases

Estate Planning:

  • Value opinions may provide a range instead of a single value figure
  • Expanded scope to assess land value separately from improvements
  • Outlook on value 5-10 years into future
  • Analysis of zoning, surrounding influences, utility

While valuation methodology stays consistent, the appraisal scope, research, documentation, review, and formatting all directly correlate to the intended use. Specific client needs shape reporting content. But core data credibility and USPAP standards remain steadfast throughout.

Do you need an appraisal if selling off the market?

Generally, yes an appraisal is still advisable even when selling a property through an off-market transaction. Getting an appraisal brings fairness and transparency to an off-market home sale by supporting pricing, assessing conditions, validating offers, calculating taxes, and complying with laws. This benefits both the buyer and seller even without a listing.

Other reasons why include:

  1. Support Pricing: An appraisal helps benchmark market value so both parties feel confident on an agreeable price reflecting what the home is objectively worth. This applies to both motivated buyers and sellers.
  2. Assess Conditions: The appraiser’s inspection may uncover issues unknown to even the seller such as roof defects, water leaks, structural concerns, and more. Better understanding total property condition.
  3. Validate Offer: A buyer may use appraisal findings supporting the value proposition to justify, validate or obtain funding approval for their offer price and terms if financing is involved.
  4. Tax Implications: Depending on type of sale, knowing accurate property value via appraisal can impact calculations like capital gains tax when determining income tax obligations from the sale.
  5. Comply with Laws: Certain home sale scenarios like distressed sales may legally require a valuation by a licensed professional appraiser to ensure consumer protections are met.

What happens if the appraisal comes under the sales price?

When the appraisal comes under the sales price, it can create a hurdle in the home selling process and cause the buyer to back out from the contract.

There are a few options to consider:

For the Buyer:

  • Renegotiate the sale price: This is the most common course of action. You can propose a new price closer to the appraised value, while the seller may argue for a price somewhere in between. Ultimately, both parties need to come to an agreement.
  • Increase your down payment: If you have the financial means, increasing your down payment can cover the gap between the sales price and the appraised value. However, this requires additional upfront capital.
  • Walk away from the sale: If you’re unwilling to adjust your budget or compromise, you can walk away from the sale, typically with your earnest money deposit returned.

For the Seller:

  • Accept the lower appraised value: This might be the easiest solution, but it means accepting less money for your property.
  • Lower the asking price: Bringing the asking price closer to the appraised value can attract more potential buyers willing to meet the valuation.
  • Challenge the appraisal: If you believe the appraiser made errors or missed key details, you can hire another appraiser for a second opinion, but this adds time and cost.
  • Sell the property “as-is”: This option attracts cash buyers willing to handle potential repairs themselves, but you might receive a lower selling price.

For the Seller:

  • Accept the lower appraised value: This might be the easiest solution, but it means accepting less money for your property.
  • Lower the asking price: Bringing the asking price closer to the appraised value can attract more potential buyers willing to meet the valuation.
  • Challenge the appraisal: If you believe the appraiser made errors or missed key details, you can hire another appraiser for a second opinion, but this adds time and cost.
  • Sell the property “as-is”: This option attracts cash buyers willing to handle potential repairs themselves, but you might receive a lower selling price.

Other factors to consider:

  • Appraisal contingency: Most purchase agreements include an appraisal contingency, allowing you to walk away if the appraised value falls below a certain threshold.
  • Lender requirements: Your lender might require a larger down payment if the loan-to-value ratio (LTV) exceeds their limits based on the appraised value.
  • Market conditions: A hot market with many buyers might give you more leverage in negotiating despite a low appraisal, while a buyer’s market could favor the seller’s position.

Can overpricing lead to lower appraisal?

The risk of overpricing includes losing serious buyer attention, harming sales potential, and reduced marketability – all factors reflected in an appraiser’s objective valuation and evaluation. A lower appraisal is the likely result. Reasonable pricing aligned to recent comparable sales from day one helps avoid this predicament.

Appraisers are objective: They use comparable sales, market data, and the property’s condition to determine its fair market value, regardless of the asking price. If your asking price significantly exceeds the supported value, the appraiser won’t inflate the valuation to match it.

Lower comparables: When appraisers look for comparable properties, they focus on similar features, size, location, and condition. They won’t consider significantly more expensive properties due to the difference in your listing. This can limit the potential comparison pool and lead to a lower appraised value.

Skepticism from appraiser: When an asking price seems unreasonably high compared to comparables, the appraiser might investigate further, potentially uncovering issues that negatively impact value and weren’t readily apparent.

Negotiation leverage: If the appraisal comes in lower than the agreed-upon sale price, it weakens your negotiating position as a seller. Buyers are more likely to stick to the appraised value or seek further reductions, knowing the independent valuation doesn’t support the original price.

Some real estate agents use deliberate overpricing strategies to lure seller clients even though this harms sales potential. While seemingly benefiting agents by winning a listing, overpricing hurts sellers greatly reducing marketability and sales price ultimately achieved. Ethical agents educate accurately on real market values. Reasonable pricing aligned to comparative sales analysis brings sellers the strongest results.

What if there are no recent sales of comparable properties near yours?

If there are no truly comparable home sales in the immediate area within the past 6 months, appraisers utilize alternate approaches to still estimate market value as reliably as possible:

  1. Expand the Search Area – Look for recently sold homes with similar attributes in adjacent neighborhoods or towns exhibiting market continuity.
  2. Lengthen the Timeframe – Carefully analyze sales older than 6 months, making further month-by-month market condition adjustments.
  3. Increase Reliance on Other Approaches – Lean more heavily on the Cost Approach and/or Income Approach based on property type and availability of reliable cost data.
  4. Apply More Appraiser Judgement – Use professional experience judging factors like quality of construction, desirability, prevailing area values, along with housing and economic trends.

Limited recent sales often reflect changing market dynamics. An appraiser notes markets trending downward or upward and cites this shortage of comparables as evidence prices are in flux. They exercise greater due diligence indicating a higher degree of uncertainty in the final value opinion.