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The Division of Real Estate receives weekly calls from consumers asking what is an appraiser and what do they do with regard to a real estate transaction. This advisory will breakdown some of the confusion around appraisals and appraisers, and provide Colorado Consumers a guide to the appraiser process when buying or selling a property. Most importantly, as The Appraisal Foundation states during Older Americans month, “older Americans are advised to hire a qualified appraiser to perform an appraisal which can help protect their equity and prevent fraud”.
An appraiser produces a written, professional, unbiased opinion of market value, to be used in making decisions in real estate transactions. Appraisers will write a report that supports their opinion. Typically, appraisers are employed by lenders to estimate the value of real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters and investment decisions.
An appraisal report is an opinion of value. The appraiser uses a number of “approaches”, typically,'' typically three, to arrive at the estimation of value. The approach used most often for residential properties is the Sales Comparison Approach – where the appraiser finds similar properties within close proximity which have recently sold. Being the most popular approach, the Sales Comparison Approach is considered the best indicator of value for a residence.
In most real estate transactions, the lender requests the appraisal. While the homebuyer pays for the report as part of the closing costs, the lender retains the right to use the report or any information contained therein. The homebuyer is entitled to a copy of the report - it's usually included with all of the other closing documents, however, the home buyer is not entitled to use the report for any other purpose without permission from the lender.
A notable exception to this is when a homeowner engages an appraiser directly. In these cases, the appraiser and homeowner may stipulate how the appraisal can be used for property mortgage insurance (PMI) removal, estate planning or tax challenges, for example. If not stipulated otherwise, the homeowner can use the appraisal for any purpose.
Most importantly, consumers need to be aware of:
- The appropriateness of the comparable sales utilized by the appraiser;
- The appraiser’s conclusions regarding the quality of the subject property; and
- The final opinion of value.
There are many reasons to obtain an appraisal. The most common is for real estate and mortgage transactions. A few other reasons for obtaining an appraisal include:
- To obtain loan;
- If you would like to reduce your property tax obligations;
- To establish the replacement cost for insurance purposes;
- To eliminate private mortgage insurance, which can be done once the equity in the home reaches 20%;
- To figure out a reliable property value when selling real estate; or
- To protect your rights in a condemnation case.
When the value of your home or other real property is being used to help you make a significant financial decision, an appraisal helps. If you are selling your home, an appraisal helps you set the most appropriate listing price. If you are buying, it helps to ensure that you do not overpay. If you are engaged in an estate settlement or divorce, it helps to ensure that property is divided fairly. A home is often a person’s single, largest financial asset. Knowing its true value means you can make the right financial decisions.
Each report must reflect a credible estimate of value and must identify amongst other things:
- The effective date of the appraiser's opinions and conclusions;
- The relevant property characteristics, including location attributes, physical attributes, legal attributes, and economic attributes;
- The real property interest valued; and
- All known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, and other items of a similar nature.
Gathering data is one of the primary roles of an appraiser. Data can be divided into specific and general. Specific data is gathered from the home itself. Location, condition, amenities, and size are examples of specific data gathered by the appraiser during an inspection.
General data is gathered from a number of sources such as local Multiple Listing Services (MLS) that provide data on recently sold homes that might be used as comparable sales.
The first step in most appraisals is the appraisal inspection. During this process, the appraiser will come to your home and measure it, determine the layout of the rooms inside, confirm all aspects of the home's general condition, and take several photos of your house for inclusion in the report. The best thing you can do to help is make sure the appraiser has easy access to the exterior of the house. Trim any bushes and move any items that would make it difficult to measure the structure. On the inside, make sure that the appraiser can easily access items like furnaces and water heaters.
The following Items, if available, will help your appraiser to provide a more accurate appraisal:
- A survey of the house and property;
- A deed or title report showing the property’s legal description;
- A recent tax bill;
- A list of personal property to be sold with the house, if applicable;
- A copy of the original plans; and
- A copy of any prior appraisals in your possession.
There is substantial difference CMAs and appraisals. What the CMA relies upon are trends to help buyers and sellers involved in real estate transactions such as set listing prices. Appraisals use comparable sales, which are verifiable resources. A CMA provides a "ballpark figure." An appraisal provides a supportable carefully documented opinion of value.
An even more important difference is the professional relationship between the homeowner/homebuyer and the person creating the report. A real estate agent creates a CMA. A licensed, certified professional who has made a career out of valuing properties creates the appraisal. Further, the appraiser is an independent expert, with no stake in the value of a home, unlike the real estate agent, whose commission is based upon the value of the home and the successful consummation of a sale.
Appraisers do not perform independent house inspections and are not home inspectors. A third-party home inspector will inspect the structure of the house. Commonly, a home inspection report includes air conditioning, electrical functions, the condition of the heating system, the plumbing; and then the structural capacity of the home such as the attic, exposed insulation, walls, floors, ceilings, windows. A home inspection report will also cover the foundation, basement and visible structures.
FHA appraisals are typically valid for 120-days. However, extensions are available in certain cases. If the initial home appraisal is updated it could be valid for a total period of a maximum of 240-days.
FHA lenders may use an appraisal up to four months on existing homes and up to 12-months on newly constructed homes. FHA appraisals work different from conventional appraisals. Once an FHA appraisal is completed on a home, the appraisal remains the authoritative valuation for the home until it expires.
Non-FHA appraisals do not have a prescribed period of validity but as FNMA, guidelines suggest that comparable sales should not be older than six months most appraisers and lenders agree that six months is the maximum time for which an appraisal should be applicable.
All the above guidelines are subject to the economic vagaries of the real estate market and natural disasters, which might result in a prior appraisal not being acceptable.
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