Real Estate Appraisal

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Real Estate Appraisal

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The real estate appraisal is an important part of the sales process.

A real estate appraisal is the process that is used in order to arrive at an accurate valuation of residential real estate, commercial real estate or land.  Each property is unique, and therefore, a detailed valuation is needed.

Real estate appraisals are commonly used by mortgage companies, banks, or other lenders prior to making a loan, in order to ensure that their investment is properly secured by a property that is worth at least as much, if not more than the amount of money they are lending against it.

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These real estate appraisals assist the lender in determining how much to lend, what the down payment will be, and even, in some instances, what the interest rate will be.

The cost of an appraisal is approximately $400 US Dollars.  Appraisals in rural areas, and for multi unit properties usually cost more.  The lender will choose the appraiser, and the buyer will pick up the fee, payable at closing.

Real estate appraisals are also often used to determine the selling price of a property. They are also needed often for selling estates, divorces, taxation, etc

Generally, appraisers of real estate give an estimate of the buildings, and the land that the buildings sit on normally prior to it being sold, insured, mortgaged, developed, or taxed.

In most countries, appraisers have to go through training, and have to be certified and/or licensed.  In the US, most states require a Bachelors Degree in addition to the license, and certification. Certified/Licensed Appraisers typically make about $55,000 per year, or about $25 per hour USD.

One of the biggest benefits to becoming a real estate appraiser, besides the fact that it pays fairly well, and is a needed, respected profession, is that it is the perfect foundation, pun intended, to becoming a real estate investor.

Knowing precisely how to evaluate a property is the single most important aspect of buying a property at a below market price, to ensure a profit, or positive cash flow.  I personally know appraisers that also invest in real estate.

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There are many valuation types strived for by the appraiser. The most common of these is market value.

Market value is defined as the price at which an asset would sell in a competitive auction setting.  Market value is considered the same as fair value, or open market value.

Other types and definitions of value are, liquidation value, insurable value, investment value, value in use, and net present value.

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The goal of a real estate appraisal is to determine property value.

There are three traditional approaches to value.

  • The Cost Approach: the property buyer would not pay more than it would cost to build the equivalent. This approach is often used by insurance companies to determine repair, and replacement values.
  • The Income Approach: close to the methodologies used for securities analysis, bond pricing, and financial valuations. This approach is often used by and for investor buyers.
  • The Sales Comparison Approach: a way of comparing amenities and characteristics of with others of recently sold comparable properties in similar type transactions.  This approach is most commonly used by single family home residential buyers.

There is a great deal of preparation, and execution in the process of a typical real estate appraisal.  The duties that are required by the appraiser are:

  1.  Confirm legal descriptions of real estate property in the public records.
  2. Take photos of the both the exterior and the interior of properties.
  3. Inspect existing, and new properties, documenting their characteristics.
  4. Analyze similar nearby properties or comparable properties to determine valuations.
  5. Maintain, and prepare current written information or data on every real estate property.
  6. Design written property value reports.

When appraising a property, appraisers not only take into consideration the subject property, but also the surrounding area. such as a busy road, the proximity to public schools and parks, or a  view from the back.

The basic valuation concepts are:

  • Scarcity – the actual supply of properties that are competing
  • Utility – the ability to meet the needs and desires of future owners
  • Demand – the desire or need of ownership, supported by the financial means to accomplish the desire
  • Transferability – how easily ownership rights are transferred from one party to another

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Appraisers typically work in one locale, so as to be as familiar with real estate trends, and property factors that affect property values, such as environmental issues.

During the full real estate appraisal process, the appraiser notes and documents their methods, research, and observations used in arriving at their resulting estimate of a properties current value.

Appraisers normally specialize in one type of real estate or another.  Residential appraisers usually don’t get involved with commercial appraisals, and commercial appraisers under most circumstances don’t provide residential appraisals.

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Home inspection is different than a real estate appraisal.

How does a real estate appraisal differ from a home inspection A real estate appraisal differs from a home inspection in that an inspection is used to determine the condition of a given property, including the house or structures and it’s systems.

An inspector is normally hired by a buyer, or a potential buyer to allow them to know what repairs may need to be made, and for leverage in the negotiating process with the seller, and basically to protect the prospective buyer from major flaws or defects.

If an inspection reveals major repairs need to be made, the buyer then can try to renegotiate price, or have the seller fix the issues prior to their moving in. The buyer can also, in some instances, back out of the deal altogether, based on the the home inspection results.

The real estate appraisal on the other hand, is more concerned with achieving a value of the property. The appraiser may use the inspection, if available, to assist him in his appraisal.

The appraiser may also similarly inspect aspects of the property to help him determine a current value. Unlike a home inspector, the appraiser will not inspect the home’s mechanical systems, and major appliances.

The real estate appraisal is seldom if ever utilized by the residential buyer or potential buyer, other than to possibly give them a general idea of value.  The appraisal is used by and for mortgage companies or lenders, insurance companies, for selling estates, divorces, and taxation.

real-estate-appraisal bummed-business-man
A home must appraise out for a lender to lend on it.

If the property does not ‘appraise out’, or is not deemed to be worth enough to cover the lender’s loan, the mortgage company, bank, or other lender will not lend on it.

The buyer must then talk the owner into agreeing to a lower price, or the buyer must  find another property to purchase.

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2 thoughts on “Real Estate Appraisal”

    1. Hi Omar, you’re welcome.
      Step One:
      In order to become an appraiser in the United States, you need to first become an Apprentice/Trainee Appraiser. You should find a certified Appraiser that you would like to work with, and let them know that you want to become an Appraiser. You can skip this step, and take your initial courses first, but a certified Appraiser can answer all of your questions, and any concerns first, and help you with the training. Once you complete your training you will need to find a Certified Appraiser to get you the required experience to apply for the Licensed Appraiser Level anyway. Complete and pass 75 hours of basic appraisal education, which includes three courses:
      Basic Appraisal Principles 30 hours
      Basic Appraisal Procedures 30 hours
      15-hour Universal Standards of Professional Appraisal Practice (USPAP) 15 hours

      Some states may require an exam. To find your state’s requirements, go to https://www.asc.gov/State-Appraiser-Regulatory-Programs/StateContactInformation.aspx

      Step 2: Become a Licensed Residential Appraiser

      Once you become a Licensed Appraiser, you will be able to perform appraisals on your own. At the Licensed Appraiser level, you can appraise non-complex, one- to four-unit residential properties less than $1,000,000 and complex one- to four-unit residential properties less than $250,000 in market value. Once you complete the criteria below, you can apply to become a Licensed Appraiser.
      Education:

      You must complete a total of 150 hours of education. The 150 hours includes the 75 hours required for the trainee level and four additional courses:

      Residential Market Analysis and Highest and Best Use 15 hours
      Residential Appraiser Site Valuation and Cost Approach 15 hours
      Residential Sales Comparison and Income Approaches 30 hours
      Residential Report Writing and Case Studies 15 hours

      Experience:

      You are required to complete 2,000 hours of experience in no less than 12 months. These hours must be directly supervised by an acceptable supervisory appraiser. Appraisers are required to maintain a log jointly with the supervisory appraiser.
      Exam:

      The Appraisal Qualifications Board (AQB)-approved Licensed Residential Real Property Appraiser examination must be successfully completed. All education, degree, and experience hours must be completed prior to taking the national exam.
      Degree:

      Complete 30 semester hours of college-level education from an accredited college, junior college, community college, or university. An associate degree or higher satisfies this requirement.
      Application:

      Once all of the requirements are completed and documented, you can submit an application to the appropriate state board. To find your state licensing board, visit the Appraisal Subcommittee website.

      After becoming a Licensed Residential Appraiser, you can upgrade to the Certified Residential Appraiser level.

      Hope this helps.
      Good luck, Tom

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