Ever wonder how appraisers arrive at the reconciled opinion of value from the appraisal they just completed on your home? This article will give the layman an idea of how this happens.
We must first identify the problem to be solved (type of value sought such as market value, insurable value and more), with market value being the most common. We must also determine what we must do to solve the problem (scope of work). Once we do this, then we proceed.
First of all, not all appraisers value the same thing. This can be related to a few things, such as the appraiser’s knowledge, the appraiser’s experience, the appraiser not being tech-savvy, appraisers being unwilling to change, and other reasons. For these and other reasons, you will never get 5 appraisers to arrive at the same opinion of value (appraisal). However, we should be in the “ballpark”. So here we go.
Subject data
Let’s start with the topic. That is the house that is being appraised. We visit the house, measure for square meters and sketch, take photos (front, back and street) at a minimum. These days, we are also often asked to take photos of interiors. We visually inspect inside and out for maintenance, quality, room additions, upgrades, and many other factors. We look at the neighborhood in question and any positives and/or negatives, such as power lines, train tracks, aircraft flight paths, overall attractiveness of the neighborhood, and more. Please note that when the term “inspect” is used, it refers to viewing, as appraisers are not inspectors, which is clearly stated on most appraisers’ addendum. it’s in mine
Comparable Sales Approach
After collecting all the necessary information and data for the topic. The appraiser focuses his attention on finding suitable comparables. Comparables are homes that have recently sold within or near the subject subdivision, generally no more than 1 mile away. Comparable can also be listings, homes that are on the market for sale but have not yet been sold. These comparables, or comps, as they are affectionately called, must be similar to the subject in terms of square footage, layout, and amenities. Any difference in any of these elements requires what we call adjustments to the compositions. Adjustments can be based on quality or quantity (qualitative or quantitative), they can be a percentage or a dollar amount. Adjustments give comps an adjusted selling price which is what we base the opinion of value on. Some of us adjusters, not all, also employ the use of tables and graphs to support our adjustments.
cost approach
The appraiser also has to consider the value of the land, depreciation, and the cost of improvements, which is only accurate when we are appraising new home construction.
Income Approach
Income is only considered when the home being appraised is a rental property and provides income. In this approach, operating income and expenses, the gross rent multipliers, are calculated.
There is much more that goes with and is considered in the last two approaches to value. However, we will continue with the primary approach to residential home value, which is the comparable sales approach. After making adjustments to sales comparables, we form an opinion of value, review, and report on a form called a URAR (Uniform Residential Appraisal Report).
It is important as appraisers before submitting any report, that we comply with USPAP (Uniform Standard of Appraisal Practice). This is what we, as appraisers, need to consider in all of our reporting and ensure that we meet the standards in all approaches to an opinion of value that we may use.
This article provides a brief overview to the consumer of how we, as appraisers, provide an opinion on the value of residential real estate. However, there is much more to analyzing the data collected and preparing an accurate and credible evaluation report.
Copyright 2010
