Real Estate Appraisals - Ten things most people just don't understand about them

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Most of us will have a real estate appraisal done at some point in our property-owning lives, and yet, as common as that experience is, there are many misconceptions about what an appraisal is, why one is needed, and how truly it reflects the value of our homes.  

I am a Maine licensed residential real estate appraiser with four years' experience; however, prior to getting my license I worked with my husband, Bert Smith, who has been a certified residential appraiser for more than 20 years.

Let's take a look at some basic questions and some common confusions about those appraisals:

1. What is an appraisal?
2. Are there different kinds of appraisers?
3. Why get an appraisal?
4. The different types of home appraisals
5. Who owns an appraisal?
6. What's the difference between appraisal and assessment?
7. How long is an appraisal good for? 
8. Appraisal?  Home Inspection?  And the difference is?
9. The final estimate of value
10. Don't like the appraisal?  Not fair, not accurate?  What you can do 

If you have any questions that are not covered by this article, I'll be happy to answer your specific questions in the "Ask an Appraiser" thread in the forum.

1.  What is an appraisal?  
 
It is an estimate of value based on data gathered by the appraise, a process that  is done through an inspection of the subject property, then comparing that property  to recent sales of  similar houses located in like neighborhoods, as close to the subject property as possible.  

Before we move into a detailed explanation of the inspection, data gathering and reporting aspects of an appraisal, let's look at more information.

2.  Are there different kinds of appraisers?  

A residential real estate appraiser starts out as an apprentice, taking basic required appraiser coursework and working for two years under the direct supervision of a fully licensed appraiser.

A licensed appraiser covers single family homes up to a million dollars and can also appraise multi-family buildings up to four units.   A certified residential appraiser does those too, but also deals with properties over $1M.  A certified general appraiser can do both residential and commercial properties and is often called on for appraising complex properties.

"I have an in-home business - a daycare.  So, do I have to get a commercial appraiser or can a residential appraiser do my appraisal?"  Absolutely.  We'll talk more about this in a future article.

3.    Why get an appraisal? 

If you are buying or refinancing a home, the lender will want an appraisal done as he needs an impartial, professional opinion of value on the property to protect his equity in the property.  If you default on payment, the lender can be assured of recouping the value of his loan to you.

If you're thinking about selling your home, you may want an appraisal to get an idea of the home's value before talking to a realtor or attempting a for-sale-by-owner.  Appraisals are also done in divorce situations and for estate planning and  settlement purposes.  

We usually get a surge of requests just after a town has done a property tax revaluation, as people question their steeply increased assessments.    Because the purpose of the appraisal is key, we work under somewhat different guidelines when doing an appraisal for a lender versus doing a private one for a homeowner, an attorney or an accountant.

"My husband and I are getting a divorce.  Should I have my own appraisal done?"  Wise idea, although ideally both your husband's and your appraisal should come in at similar values.   BUT, this raises an important point:  an appraisal is done under the direction of the person ordering it; thus, your husband may instruct his appraiser that he is looking for a conservative value, while you might want your appraiser to look at the high end of the value range.  

4.  The different types of home appraisals

While appraisals requiring both an exterior and interior inspection of the property are the norm, an exterior inspection only, called a drive-by, may also be ordered.  Obviously not as comprehensive, a drive-by is likely to be used when there's little question about the value of the home supporting the loan amount requested.

5.  Who owns an appraisal?   

This is one of the trickiest and stickiest areas we deal with.  The person (or company) ordering the appraisal owns it, and all the information contained in that report.  We cannot release any of that information to anyone else - period -  without written authorization from the orderer.  

"But, wait a minute, I paid for the appraisal.  And now you're saying you can't even tell me what the final  figure is?"  That's right.  We often get the homeowner who wants the house and the broker who wants the sale calling to see if the property appraised, came in at the value necessary.  We absolutely cannot release that information to anyone but the lender, and then the lender can share the appraisal with the client, the realtor, etc.

"My deal feel through with lender ABC, and now I'm going with XYZ.  Would you please send them a copy of your appraisal."   Nope, can't do that.  ABC owns that appraisal and it cannot be re-assigned.  

6.   What's the difference between appraisal and assessment? 

First, these two types of home valuation are done for different purposes and within different time frames.  Assessments are done on a town-wide basis usually for purposes of equitably levying taxes.  

Revaluations of a town's residential properties, in our home state at least, are mandated every ten years to reflect ongoing market factors  and new trends in the values of new and older homes, waterfront properties, condominium projects, even the newer age-related (Plus 55) communities.  

An appraisal focuses on a specific property and ideally pegs its value to similar houses that ideally have sold within the past six months, and which are within a mile of the subject property.  Needless to say, those parameters aren't always workable.  

For example, when we appraise a multi-million dollar property with deep waterfrontage, we may have to go way up and down the coast of Maine to find truly comparable properties.  And of course the same applies when we're appraising homes in small  rural towns that may not have seen many home sales in the past year, let alone of houses like the subject.

Second, the final figure in an assessment may only be a percentage of the total value of the property.  What does that mean?  An assessment ratio means that the figure your hometown places on your property may only be 80% of what was determined to be the fair market value when the valuation was done.  

"The town has my house assessed for $100,000, yet your appraisal came in at $275,000.  How can that be?"  Well, the assessment could be based on seriously outdated figures, especially considering the hot market and rapidly accelerating values of the past few years.  And, the assessment may only be a percentage of the originally determined value.  

An appraisal is a more accurate reflection of what you could reasonably expect to sell your house for in today's market.

7.  How long is an appraisal good for? 

It can be used for a lending decision up to a year after completion, but in today's challenging real estate environment, a lender might not want to go over six months.  But, that can be handled through a re-certification of value, so that the borrower doesn't have to pay for a whole new report.  

It is important to note here that an appraisal's estimate of market value is always stated as of a specific date, the date the property was physically inspected.  

"For Pete's sake, the new garage is almost done, the materials are all here,and the appraiser could certainly see that."  Homeowners really struggle with this one, especially if they're building a new house and those last little things aren't quite done at the final inspection.  They want us to consider it, report it, done based on their good intentions.  Wrong!  

Legally, we must say only what we see when we're seeing it.   It's a snapshot of the property as it is at that time, period.   Suppose there's a fire, a flood, or the contractor walks off the job... it's very easy for a home's value to change drastically in 24 hours.

8.  Appraisal?  Home Inspection?  And the difference is?  

Big, very big!  For an appraisal, we look at things that may present health or safety issues such as a cracked foundation, exposed wires or broken plumbing.  Our reports include only "readily observable items and surface observations."

While we make sure there is running water and a functioning heating system, we don't test those mechanical systems, and we don't make recommendations beyond repairs needed to address any observable health/safety deficiencies.   

Home inspectors and appraisers have very different licensing requirements, in states that even require a license for home inspectors!

9.  The final estimate of value

This is the bottom line, the only line a lender, broker, home seller or others really care about, the final figure for the estimated market value of the property.  

While we appraisers have been accused of reading chicken innards to arrive at that figure, we have do have clear, consistent guidelines we must follow, with professional discretion of course.  Appraisers countrywide use a standard forms and the most common type of report for a single family home is the 1004, developed by Freddie Mac and Fannie Mae.  

Because these two entities are the biggest mortgage lenders/backers in the country, they've determined the industry's standard reporting criteria.  

10.  Don't like the appraisal?  Not fair, not accurate?  What you can do 

Ask questions and discuss with the appraiser what you don't understand or what you believe are discrepancies, errors.  We're not infallible!  (Sorry, guys, I know that'll come as a shock!)  But, accept, too, that the appraiser approaches things from a very different perspective than the broker, lender or homeowner does, and that's our job!

"The house right next door sold two months ago for $23,000 more than the value the appraiser put on our house, and we have a two-car garage that house doesn't have."   Ahhh, yes, we do hear this frequently.  But, that neighboring house may have substantially more space, an updated kitchen/baths,  a finished basement or any number of other amenities that offset any value the garage would add, differences that aren't perhaps obvious at a glance.

"I had an appraisal done and the jerk didn't even count the family room, two bedrooms and bath in the basement!"  So just what do we appraisers look at and look for when we inspect your house?  How do we compare your house to others?  How do we decide how much an extra bay in the garage or an updated kitchen is worth?  Stay tuned!  In my next article, I'll detail the process.  And tell you why those basement rooms don't count!

If you have any questions that are not covered by this article, I'll be happy to answer your specific questions in the "Ask an Appraiser" thread in the forum.

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