FREQUENTLY ASKED QUESTIONS

• What is the market approach? 
• What is a comparable sale? 
• What is an arms length transaction? 
• What is Market Value? 
• What is the Cost Approach? 
• What is the income approach? 
• What does highest & best use mean? 

WHAT IS AN APPRAISAL?

A Real Estate Appraisal is an objective opinion, by a appraisal professional, of the value of real property. The person performing the appraisal should have sufficient knowledge and adequate experience to accurately give an opinion of value.

Real estate appraisers use recent comparable sales, current market data, neighborhood and community information, as well as local and national economic information to support the final value opinion.

A professional appraiser uses a multi-step process including:

• Definition of the Appraisal Need
• Data Collection and Analysis
• Site Valuation
• Highest and Best Use Determination
• Three Approaches to Value, Cost, Sales Comparison, Income
• Reconciliation of the Values
• The Appraisal Report

The Appraisal Report will normally include items such as: maps, pictures, sketches, and usually three pages titled UNIFORM RESIDENTIAL APPRAISAL REPORT. All of the information gathered during the valuation process is analyzed and condensed in this standardized report. The first page contains the basic information about the subject, the second page contains the indicated values from the three approaches to value, and the third page includes comments about the report.

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WHY IS AN APPRAISAL IMPORTANT?

Because much private, corporate, and public wealth lies in real estate, the determination of its value is essential to the economic well-being of society. It is the job of the professional appraiser to determine these values by gathering, analyzing, and applying information pertinent to a property. 

Unquestionably, the professional opinion of the appraiser, backed by extensive training and knowledge, influences the decisions of people who own, manage, sell, purchase, invest in, and lend money on the security of real estate. And because the appraiser is trained to be an impartial third party in the lending process, this professional serves as a vital "check in the system," protecting real estate buyers from overpaying for property as well as lenders from over lending to buyers. 

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WHEN DO I NEED AN APPRAISAL?

Any time that it is important for you to have an accurate objective opinion of real estate value, you need an appraisal. If you are the seller, the appraiser can provide a valuable marketing tool for your sale. If you are a lender, the appraiser protects you from over lending to buyers. The appraiser can save you unjust PMI dollars or insure that you are treated fairly in a divorce settlement. A few of the most common reasons to have an appraisal are as follows:

MORTGAGES - Financial institutions almost always require an appraisal prior to lending money on real property.
SALE OR PURCHASE - Owners or buyers of real estate often order an appraisal to establish a fair value for setting and asking price or doing a for sale by owner contract.
ESTATE PLANNING OR SETTLEMENT & DIVORCE - It's important to establish an objective value for real property when planning your estate or during a property settlement.
INVESTMENT CONSULTING - Investors and private individuals need to be informed of the facts to make wise decisions about purchases, remodeling, or resale values.
PROPERTY TAX ASSESSMENT, REVIEW AND APPEALS - An appraisal is usually necessary to accurately review your assessment and it is essential in any appeal of your tax assessment.

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WHAT DOES AN APPRAISAL COST?

Visit our Forms page for our current pricing.

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How long does an appraisal take? 

The physical inspection of the real property being appraised can take from twenty minutes to several hours, depending upon the size and complexity involved.  After the initial inspection of the property the appraiser also spends time evaluating the neighborhood or area. The purpose of this is to search for other properties that are similar to the property being appraised that have sold within the last year or so. When the field work is finished, the appraiser completes returns to his or her office and gathers even more information for the report. The report can consist of a short form report (typically under ten pages) to a long narrative report which can sometimes exceed a hundred pages. A short form report usually takes between three to six hours to complete. A narrative report can take weeks or sometimes even months, depending upon how complex the assignment is. 

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Why are appraisals so expensive if your inspection usually takes less than an hour?

Home inspections are just a small part of the appraisal process. The appraiser spends many hours researching the market before and after the inspection, gathering, verifying and analyzing market and specific data. The appraiser is required to analyze three approaches in determining your market value. The Sales Comparison Analysis is the essence of the appraisal. This is the section that compares recently closed comparable sales from your specific market area or neighborhood to your home, adjusting for the variations in the homes used for comparison. The second approach to value is the Cost Approach. The appraiser determines what your home cost to build new, determines any depreciation, and determines your land value as though it were vacant. And lastly, the Income Approach determines your home value based upon market rents, if applicable. After considering all approaches to value, the appraiser then reconciles the most appropriate market value or range of values for your property.

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What exactly is PMI and how can I get rid of it?

Private Mortgage Insurance (PMI) insures a lender (bank or mortgage company usually) against loss on homes purchased with a downpayment of less than 20%. Once your equity is 20% of your appraised value, then the PMI is eliminated and your savings are immediate. To get rid of your mortgage of PMI, you will contact your mortgage lender and ask for specific instructions for eliminating PMI. All mortgage lenders require a professional appraisal for this process to prove your home's value in relation to your equity.  So this is a way to lower your mortgage costs once you have built up some equity in your home.

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How do I prepare for the appraisal?

Upon receiving the appraisal request, one of our appraisers will contact you for a convenient time and date for the inspection. The appraiser will come to your property, take measurements from the outside, photograph the exterior and any pertinent items, and perform an interior inspection if applicable. An average size dwelling inspection will take from 20-60 minutes.

To speed things along, it is helpful to have the following available for the appraiser: 

• Survey of the house and property 
• Deed or title report showing the legal description
• Deed restrictions 
• Recent tax bill
• Date and purchase price you paid when you purchased the property
• Copy of the original plans & specifications or any floor plan rendition 
• Sketch from a previous marketing brochure or appraisal 
• List of personal property to be sold with the house if applicable
• Any mandatory homeowner association information 
• List of recent improvements and cost is helpful to the appraiser.

What is "Market Value?"

To simplify a complex definition, "Market Value" is the most probable price your property would sell for in a competitive and open market under all conditions requisite to a fair sale. This assumes that the sale is "at arms length" meaning that the buyer and seller are not related, or there are no special circumstances or undue stimuli, which would bias the sale.

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Which form should I choose?

The standard Fannie Mae 1004 (URAR) form is the most extensive single-family form and is the most widely requested for a conventional or FHA loan by all lending institutions. The form contains comprehensive information with addenda necessary for underwriters to make lending decisions. It is the most costly single-family form.

The Fannie Mae forms 2055 and 2065 are very similar to each other and are often referred to as "Limited" or "Drive-By" appraisals. The appraisals actually require the same amount of data to be gathered, analyzed and reconciled; however less written reporting is required. Therefore, the processing time is shorter than for the 1004 and less costly. These forms are especially useful for sellers trying to price their home for sale, for an estate tax situation, tax assessment grievance, divorce settlement, helping a buyer to decide how much to pay for a home, and for PMI removal, when approved by the lender.

Short form "2055" Vs. "URAR Fannie Mae" Form Appraisal Report 

A "Fannie Mae" - URAR form report has many items required by the secondary mortgage lending market, that are not necessarily needed for a simple report to find market value. Both types rely primarily on a direct sales comparison or market approach with a comparison grid to determine the market value of the property being appraised. The lenders report has many additional requirements which have little bearing on the value found by a report needed for many other purposes. The traditional "lender" reports need census tract & SMSA information for tracking lending patterns. Some lender reports require a lot of the appraisers effort to determine and substantiate how much additional rental income is available to support a higher mortgage. In addition, a great deal of detail is required to help the lender determine what if any, necessary repairs might be needed before the property meets their underwriting requirements. All of these things and much more, may be quite important for a lender, but probably are useless for most people, who just want to know what a property is worth for a variety of reasons. Our short form reports are particularly well suited for helping a seller to price a home for sale, helping a buyer to decide how much to offer or pay for a home, for estate tax, gift tax, tax grievance, uncontested divorce & most any other potential use other than for obtaining a mortgage or in litigation where the report will be used in conjunction with expert testimony. 

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Appraiser Qualifications 

Many states require all real estate appraisers to be, at a minimum, state licensed or state certified and have fulfilled rigorous education and experience requirements and must adhere to strict industry standards and a professional code of ethics as promulgated by the Appraisal Foundation. For Qualifications Standards go to: http://www.asc.gov/content/category3/page0.html

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Appraisal VS. Engineer or Whole House Inspection? 

The appraiser is not a whole house inspector, engineer, architect, electrician, plumber, H.V.A.C. technician or contractor. The appraiser briefly walks through the house to get an idea of the general condition and room count. An appraisal is not a guarantee of condition. The appraiser will ask about any visible problems and those which may not be visible, and will do his/her best to gauge any impact on value attributable to those problems. You are encouraged to seek the advice of experts if you have any questions about the structural or mechanical aspects.

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Services provided 

You may need and use the services of a professional real estate appraiser for a variety of reasons. Depending upon an appraiser's designation and qualifications, he or she can provide some or all of these services: Appraisals - Residential or Commercial; Counseling and Consulting; Evaluations; Expert Witness Testimony; Litigation Preparation; Feasibility Studies; Market Analysis; Market Rent & Trend Studies; Tax Assessment Review and Advice or Zoning Testimony.  Stout Appraisals specializes in 1-4 Family Residential Appraisals.

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Know Your Rights 

Under the Equal Credit Opportunity Act, your lender must provide you with a copy of the appraisal report upon your written request. If you are dissatisfied with any information contained in your appraisal report, you should contact your lender immediately.

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The Appraisal Process 

The appraisal process is an orderly and concise method of reaching an estimate of value. The process has six major steps which include: definition of the problem, preliminary survey and appraisal plan, data collection and analysis, application of the three approaches to value, reconciliation of value indications, final estimate of defined value. This process assists the appraiser in reaching a sound conclusion. The major phase of this process involves the application of the three approaches to value which include the Market Data Approach, the Cost Approach and Income Approach. The three approaches are reconciled and the value via most applicable approach, in the opinion of the appraiser, is selected as the final estimate of value. In most residential appraisals, particularly those of single or two family dwellings, the direct sales comparison or market best reflects the actions of buyers and sellers and is the most convincing and defendable approach to value.

The market or direct sales comparison approach to value 
The market or direct sales comparison approach to an estimate of value is a process of comparing market data, that is, prices paid for similar properties, prices asked by owners, and offers made by prospective purchasers or tenants willing to buy or lease. Typically a comparison grid is used and adjustments are made to each of the comparable sales used for major differences between the comparable and the subject property for such items as location, gross living or building area, lot size, condition/effective age, market conditions, degree of remodeling, construction quality and significant amenities, ie: fireplace, jacuzzi, in ground pool, garage, deck, patio, porch  and central air conditioning etc. In the market approach, the appraiser attempts to both gauge and reflect the anticipated reaction by a typical purchaser to the subject property. 

Comparable sales 
A comparable sale is a property, that is similar to the subject property in most respects, is located in a similar (nearby) location, and has sold recently at arms length. The selection of comparable sales is in most residential appraisals, the single most important determining factor in establishing value. It is the appraisers responsibility to adequately research the local real estate market and determine which comparable sales best represent the value characteristics of the subject property. 

Arms length transaction 
An arms length transaction is one in which both seller and purchaser act independently of each other and have no connection or relationship to each other. 

Market Approach 
Market value or fair market value is the most probable price that a property should bring (will sell for) in a competitive and open market under all conditions requisite to a fair sale,  the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised; (3) a reasonable time is allowed for exposure to the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the  property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. 

The Cost Approach
The cost approach combines an estimate of land value with an estimate of depreciated reproduction or replacement cost of the improvements. The principle of substitution is the basis of the cost approach, in that no rational person will pay more for a property than the amount for which he can obtain, by purchase of a site and construction of a building, with undue delay, a property of equal desirability and utility. 

The Income Approach
The income approach is based on an estimate of net income from the operation of an income producing property and the selection of the property capitalization rate from market indications of similar properties. The principle of anticipation is the basis of the income approach and affirms that value is created by the expectation of benefits to be derived from possession, operation and/or capital gain at resale. 

Highest & best use 
Typically, highest & best use means the use or utilization that provides the most profitable return on investment. It is that use, selected from reasonably probable and legal alternative uses, which are found to be physically possible, appropriately supported and financially feasible to result in the highest possible land value. 

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Uniform Standards of Profesional Appraisal Practice (USPAP)

Appraisal Standards Board (ASB) 
The ASB sets the rules for developing an appraisal and reporting the results. The ASB also promotes the use, understanding and enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP). 

FIRREA requires that real estate appraisals used in conjunction with federally-related transactions be performed in accordance with USPAP. More than 80,000 state certified and licensed appraisers are currently required to adhere to USPAP. USPAP contains the  recognized standards of practice for real estate, personal property and business appraisal.  The authority of USPAP extends beyond FIRREA. Since 1992, the Office of Management and Budget (OMB) has required federal land acquisition and direct lending agencies to use appraisals in conformance with USPAP.

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