Ever wonder how appraisers come up with the reconciled opinion of value for the appraisal they just completed on your home? This article will provide some insight to the lay person on how this occurs.
We must first identify the problem to be solved (type of value sought such as market value, insurable value and more), market value being the most common. We must also determine what we need to do to solve the problem (scope of work). Once we do this, then we proceed.
First, not all appraisers appraise the same. This can be related to a few things such as appraiser knowledge, appraiser experience, appraiser not being technologically savvy, appraisers not willing to change and other reasons. For these reasons and others, you will never get 5 appraisers to come up with the same opinion of value (appraisal). We should however, be in the “ballpark”. So here we go.
Let’s start with the subject. That is the house being appraised. We visit the home, measure to obtain square footage and sketch, take photos (front, rear and street) at a minimum. These days we are often required to take interior photos as well. We visually inspect inside and out looking at upkeep, quality, room additions, upgrades and many other factors. We look at the subject neighborhood and any positive and/or negative aspects such as power lines, train tracks airplane flight paths, overall neighborhood appeal and more. Please note, that when the term “inspect” is used, it is referring to visualization as appraisers are not inspectors, which is clearly stated on most appraisers addendum. It is on mine.
Sales Comparable Approach
After gathering all necessary information and data for the subject. The appraiser turns his/her attention to finding appropriate comparables. Comparables are homes that have recently sold within the subjects subdivision or close to the subject generally not more than 1 mile away. Comparables can also be listings, houses that are on the market for sale but have not yet sold. These comparables or comps as they are affectionately referred to need to be similar to the subject in terms of square footage, design and amenities. Any differences in any of these items require what we call adjustments to be made to the comps. The adjustments can be based on quality or quantity (qualitative or quantitative), they can be a percentage or a dollar amount. The adjustments give the comps an adjusted sales price which is what we base the opinion of value. Some of us appraisers not all, also employ the use of charts and graphs to support our adjustments.
The appraiser also has to consider land value, depreciation and cost of improvements which is only accurate when we are appraising new home construction.
Income is only considered when the house being appraised is a rental property and provides income. In this approach, income and operating expenses, gross rent multipliers are calculated.
There is much more that goes with and is considered in the two latter approaches to value. However, we will continue with the main approach to value for residential home which is the Sales Comparable Approach. After adjustments are made to the sales comparables, we form an opinion of value, review and submit our report on a form which is called the URAR (uniformed residential appraisal report).
It is important as appraisers before we submit any report, that we are in compliance with USPAP (uniform standard of appraisal practice). This is what we as appraisers have to consider in all of our reports and make sure we are adhering to the standards in all approaches to an opinion of value that we may use.
This article provides a brief overview to the consumer on how we as appraisers provide an opinion of value on residential real estate. There is however, so much more to analyzing the data gathered and preparing an accurate and credible appraisal report.