What Is a Real Estate Appraisal

There is always some variation when people are involved in something, and every potential buyer or seller brings a unique variety of preconceptions to the table. But the definition of Market Value includes certain assumptions that the buyer and seller are well informed, that they are acting in what each perceives as their own best interest, are not unduly motivated or under pressure to complete the sale, and that the value is in terms of U.S. dollars or typical financing (nothing creative or unusual).

People generally think of an appraisal as reporting value only. But when you have the report in your possession, read it. All of it. We advise clients to call us if there is something about it they don't understand. The appraisal report is a "snapshot" of the property and the neighborhood. It may talk about property taxes in relation to other towns, it will compare the subject property to others in the neighborhood by age and price ranges, talk about employment, shopping, major roads, and typical market times for similar homes. If there are unusual characteristics in the lot, such as easements for power lines or others using your driveway to haul timber from a nearby wood lot and the appraiser has found them, they will be reported. Sometimes, when the appraiser has finished his work, he knows more about the property than the owner. Not that the owner was intentionally hiding anything. He has just lived with those things for so long that he doesn't think about them any more, or hasn't considered their consequences to a new owner who might want to expand the home or develop the property in a new direction.

Property Types (Or, What Can Be Appraised)

The appraiser might be called upon to value a large tract of land, a residential subdivision, a shopping mall, or an office building. Some of the properties we do include:

In the real world, if we were talking about investment property, you might have to worry about tenants leaving in the middle of the night owing you three months back rent or fixing the place up after they've trashed it, repainting costs every couple of years and so forth. The appraiser estimates all of these things in current dollars, then brings it back to the Present Worth by any of several methods at his disposal.

The Appraiser's Tools and Methods

Area real estate transactions. As a member of the Realtors and the state-wide Multiple Listing Service on-line we have access to most of the listings of properties and the completed sales. Also, as a subscriber to Real Data on-line we can search for sales anywhere in the state by date, price range, type of property, grantor/grantee, or by address then reference the registry recording by book and page and electronically order the deed. Additional details on a property can then be obtained by follow-up at the town assessor's office.

Software. The appraiser has one of the most powerful software systems available, integrating digital imagery, on-screen sketching and bit-file mapping, all of which allow for faster report production and a more professional appearance than the older use of film photography and photocopied maps with hand-applied notations.

EDI (Electronic Data Interchange) is possible because of these improvements, and permits the appraiser to instantly transmit the entire appraisal report to a client who has the necessary software for another time- saving feature.

The appraisal report begins with a description of the neighborhood (price ranges, ages of homes, quality of access to schools, shopping and work) and conclusions about its stability and its desirability in comparison to other competing areas.

Next is the site description including size and shape, zoning compliance and any easements or restrictions, all of which affect its utility. Also, the availability of utilities, maintenance of streets, and so forth.

Then the improvements, the buildings, are described in some detail such as the number of rooms, quality and condition, size of the home, and any special features. There usually are pictures and sketches on additional pages.

Finally, the valuation by at least one of several methods with explanation as to why each approach was selected or not, and the importance given to it. The three methods are Cost (replacement), Sales Comparison (what has been paid for similar properties) and Income (if it is rental or commercial property).

The appraisal analyzes property rights plus improvements and expresses the total as a dollar value in the current market. There should be a logic that moves consistently from step to step in the report, with each conclusion becoming the starting point for the next stage in the analysis.

Specialized Uses of Appraisals

The most common use is when a buyer applies for a mortgage to assist with the purchase, or when a homeowner refinances or wants a home equity loan. The bank reviews the application, checks the borrower's credit report, and finally orders an appraisal on the home which is used to secure repayment of the loan.

Divorce

When one spouse intends to keep the family home and buy the other out, the value estimate can have great importance to both sides. The party receiving cash for giving up ownership will benefit from a high value, while the party retaining the property benefits from a low estimate. Often, both sides will hire their own appraiser. A skillful appraiser can prepare a report that is more convincing to the court and less vulnerable to skewing from a "biased" report that unfairly favors one side at the expense of the other.

Estate Settlement and the Internal Revenue Service

If you find yourself in this situation, my recommendation is that you see a good attorney first. There may be a deed that needs to be prepared or a trust created, but the attorney can select the appraiser and define the assignment in a more precise way. Perhaps there is a potential liability for estate taxes that the attorney can help you avoid. There was an assignment I performed a number of years ago which involved an owner of several hundred acres of land who deeded the development rights to a conservation group and took a substantial tax benefit. The IRS questioned the appraisal five and a half years later. The challenge was over a minor detail in my report and we settled things in less than five minutes on the phone, but had that gone unanswered the entire tax return for that year, and perhaps subsequent years, would have been at risk. Be sure your appraiser will still be around for at least a few years to answer questions and is willing to defend his work.

Employee Relocation

This becomes more important as more companies downsize or move valued employees to key locations as they consolidate operations. The employee is faced with the choice of job loss or moving to another area of the country, often with little time to prepare. And there are the questions of mortgages, schools for the children, selling the home, separation of the family during the transfer. This can be a very high stress event. The use of a Relocation Company can smooth things out for the employee, who becomes known now as the transferee. The Relocation Company helps the transferee with the move including the selection of community and neighborhood, schools for the children, finding a new job for the spouse in a similar position or a related field if it is a double income household, and finally the selection of a new home. Often they even help with financing the new home with bridge loans as well as first mortgages. But the key is their offer to buy the existing home, pay off the mortgage, and provide the needed down payment on the next home. They make an offer based on their appraisal of the home which, if accepted, allows the transferee to move on to the new community with a little less disruption to the family.

Buyer Offers

If you are new to an area you may be unacquainted with local property values. Or you may not be aware of local characteristics that might affect property values in general or only the property you are interested in, such as a downturn in the local economy that has depressed home values, or the road to the home is not maintained by the town for winter travel. Listing prices are a guide, but they may take a year or more to respond to a market that has changed quickly. And if you are from the south and shopping for a home in mid-summer, winter plowing and, even worse, "mud season" as the frost comes out of the ground could be an unpleasant surprise.

An appraiser can advise you of a realistic value for the property on which you can base an offer. While you probably will not be able to take your appraisal to the bank for your mortgage because banking regulations require them to order their own, the few hundred dollars you spend could save you many thousands of dollars later. Don't assume that the bank appraiser will inform you of everything you want to know. His client is the bank, not you. You probably will not even see his appraisal until after you have completed the purchase, and by then it will be too late to change your mind because of something you found out.

Property Tax Abatements

New Hampshire advertises that we have no sales or state income tax, but don't think that that means we pay less taxes. It just means that the homeowner pays more than in other parts of the country, and the accuracy of the property tax assessment becomes more important. If you think that you are paying a higher tax than is your share, you might want to hire an appraiser as the first step in correcting your assessment.

The process for a successful abatement appeal is a little different than other assignments but no less rigorous and almost certain of a thorough and close examination, so if you are offered a low price for such an appraisal you should be suspicious. Question the appraiser, and ask for references. Then follow up and find out if those former customers were successful in having their taxes lowered.

Of Ethics, Competency....and Sanity

We have a society in which consumerism is the single most important economic force, and most of it is based on debt. Credit card purchases have passed the one trillion dollar mark annually and while personal bankruptcies have declined the past two years they are still four times the number eleven years ago. Marketing of home mortgages has evolved from 80% loan to value ratio to offers of 125% of the home's value. Home mortgage refinancing is touted as a solution to high interest credit card debt, which then allows the consumer to charge up the cards again. All this comes ten years after a decade of bank and S&L failures, including in my own New Hampshire, which nationally ran up a charge to taxpayers of an estimated $700 billion.

This is not sanity.

I've been an appraiser since the run-up in property values in the 1980's, worked through the crash in the Northeast that began in 1988 and the recession that lasted until 1993, and am seeing a recovery that I sometimes describe as being a mile wide but only an inch deep. Incomes are up from several years ago and unemployment has been hovering around 2% or 3% but the job market is becoming more retail and service based with lower wages and fewer benefits. It is not uncommon for a two-parent household to depend on the income from three jobs. In short, any downturn in the economy or rise in interest rates affecting all those Adjustable Rate Mortgages will drive many people over the edge and increase the number of bankruptcies and foreclosures.

Home prices have been rising, although increases may not be evenly spread across all neighborhoods and all price ranges. Rents have been rising and apartment vacancies are at almost record lows, but it is rare to find new construction for rental units because many of the people looking for apartments can't afford the higher rents. It is a very mixed economy with some sectors and geographical areas doing very well and others that are just getting by. An appraiser must be familiar with the local market and avoid over-generalizations that fail to illuminate the forces driving neighborhood property values.

Anything less is not competency.

In 1991 one of my major clients, a New England based mortgage company, advised me they were closing operations due to a large number of foreclosures that were making it difficult to sell mortgages on the secondary market. The chief lending officer added, however, that nearly none of the homes I had appraised for the company were in default and he credited that to the carefully researched and detailed methods that characterize my work. The lesson from this is that accurate appraisals are essential to sound lending practices. A lesson repeated by the Congress when it passed legislation requiring minimum standards and licensing of appraisers who it held responsible for many of the banking problems through a lack of knowledge or professionalism.

Sellers and refinancing borrowers want to receive the highest price they can for their property. Buyers have an emotional commitment to an agreed price because of their desire to purchase the property. Brokers and loan originators are paid commissions based on the value of the sale or loan. The only person in the process who is paid a flat fee, whether the deal is consummated or not, is the appraiser. Theoretically, he is free to state his informed opinion of the property value.

The problem? This is an industry that sells debt. Appraisers who have higher rates of loan rejection, whether from low values or from other complicating facts about the property that are revealed in the report, tend to be dropped from the list because they interfere with loan volume. Appraisers who depend on large volumes of work quickly learn not to report a lack of maintenance, unsightly conditions, or to mention the presence of a twenty-five year old underground oil tank on the premises. Whether by commission or omission, a lie is still a lie, and the report becomes misleading.

The appraiser has a position of trust, not just to his client but to truth, and any breach of trust raises questions about the appraiser's ethics.

Debt is not by itself a thing to be avoided, but has sometimes been misused. A home is not an investment, despite what a real estate broker will tell you; it is a place to live and raise a family, a place that holds those memories after some have moved on, a place to return to on the holidays. But as an investment it appreciates much too slowly (about at the same rate as a passbook savings account), it's hard to withdraw your money (either wait for a buyer or refinance and pay interest for the use of your own equity), and the penalties for closing the account are steep (nationally about $7,000 for broker's commissions and other expenses on the sale of a $100,000 home regardless of the size of your equity). I'm not trying to discourage people from owning their home or from refinancing it from time to time; that's how I earn my living. I feel a personal commitment to helping people into affordable housing, especially first-time buyers or those with marginal assets because for many homeownership is a way out from poverty. But we need to do it with sound lending practices, and that begins with honest appraisals.

Let's just use a little common sense and bring some sanity back into the process.

So how do you find an appraiser who's competent, honest and ethical? Competent means that he understands the tools of his trade, which is science and math. He collects data, sorts it for usability and accuracy, verifies it, extracts the adjustments from the data, then applies them to the sale prices or the rental amounts. Differences between the several indicators must be reconciled. Basic arithmetic is not enough; algebra is essential, some knowledge of statistics is helpful as is some trigonometry. The appraiser needs to be able to calculate financial equations, set up spreadsheets, and write a report that the lay person can understand. He knows the Uniform Standards of Professional Appraisal Practice thoroughly and adheres to it as a matter of daily practice. He has a thorough knowledge of appraisal theory and an extensive and well worn library to support it. He may be designated by a prestigious organization, or not. He should have a license and he should have experience, several years at least, and have a program of continuing education.

If you have the opportunity to choose your appraiser, you might ask these questions:

How do they determine Market Value? Listen for evidence that the appraiser understands the appraisal process and can communicate it, to you and to the bank, mortgage company, or to the court if testimony might be needed. I have been involved in cases where the other side lost because the appraiser couldn't explain how he arrived at his conclusions.

How long have they been in business? Eight years is long enough to have seen the market gyrations that have taught some of us that markets move down as well as up.

How do they value economic obsolescence in the neighborhood? That includes the run-down property at the end of the street or a power line behind your home. Most properties do not have economic obsolescence, but if your home may you should be particularly interested in his answer. Also, not all instances of economic obsolescence affect value.

What do they do when there are no neighborhood sales? The usual answer is that they select sales from other, similar, neighborhoods. How many months back are they willing to search for neighborhood sales?

How do they determine similarity among competing neighborhoods? Vague answers may be a "red flag", good answers may include criteria such as density of development, price range, incomes, or even census tracts.

How many appraisals do they do per week? Three or four is a good number for a thoughtful, thorough, analytical appraiser. Eight or ten a week suggests a "cookie cutter" operation, or what I sometimes call a "form filler" instead of real appraising.

What do they know about my town? Some of the best answers will be subjective.

Will you tell me the value when the inspection is finished and before you leave? This can be a real problem if the answer is "yes". That means that the appraiser arrived with a preconceived notion of the property value and may not carefully weigh all of the features that make your home special.

How long will it take to look at my house? Before they answered, did they ask what kind of house, how big it is, or any other question that suggests they expect to be there long enough to do justice to your home?

Are they licensed, and will they be the one doing the appraisal? The real question here is, will they show up with a trainee who will actually be writing the report? Admittedly, the next generation has to learn on somebody's house but not on mine. Unless, maybe, you're talking to the trainee and he/she has answered well on all the questions you have put to him or her, but most trainees don't get it right the first time and the licensed supervisor doesn't have time to tear it apart and send it back because the bank wants it tomorrow.

Accurate appraisals are to your benefit, not because they have different values than poorly written ones but because they move smoothly through the bank's underwriters. Appraisals with weak supporting data or conflicting statements get stopped until the appraiser writes an addendum to explain what he meant or reprints the report to correct a mistake. Reports with numerous errors may be sent out for a formal field review before the loan can be closed. Accurate appraisals are reader-friendly, understandable, and clearly show the relationsip between local market conditions, the data used, and the final value.

I have been in the real estate business since 1982, both as a sales agent and broker and since 1986 as an independent fee appraiser after leaving government work as a Meat and Poultry Inspector for the USDA. Locally, I was a volunteer on the fire department and was code officer for the two years I was First Lieutenant. I have a BA in Education and have continued to take appraisal courses and attend seminars that expand my skills, including learning how to use the newest technologies that expand an appraiser's abilities to produce a credible report in the shortest time at the lowest cost, and have become a resource for other appraisers in the state. When licensing by the state became available, I was among the first group of appraisers to receive one, approximately 18 months before they were required for certain types of work. New Hampshire offers four levels which are, from lowest to highest (most complex), Apprentice Appraiser, Licensed Residential, Certified Residential, and Certified General.

I hold the latter, and enthusiastically embrace the ethical and knowledge standards of the licensing law.

But while I am licensed to perform all appraisals, there are many that I might consider myself unqualified to do because of complexity (such as an interest in a sheltered trust), lack of experience (a golf course or marina requires one who is very familiar with that sort of work), or in an area in which I have no experience (such as island property). In those cases I would be happy to refer you to someone who is more qualified. On the other hand, I have accepted some out of the ordinary assignments with relish. Like the hunting lodge in Northern Coos County surrounded by miles of wilderness, a reproduction of a 250 year old home built using antique tools copied in a blacksmith shop and blown glass windows for authenticity, a land-locked lot, a lake side home with a life estate, and a commercial well.

Finally, be honest with your appraiser.
Let him know what it is you really intend to do with it. If you want to appeal your property taxes, don't say that you just want to know what your house is worth. The report you get probably won't do you much good because it doesn't address the issues in the most appropriate manner. Or, if you want a bank loan, tell me. I'm not going to take your money for a report that the bank won't accept because they didn't order it. Instead, choose your bank based on how they treat you because you're going to be doing business with them a lot longer than you will with the appraiser, and ask them for a list of their approved appraisers and see if you can choose from that list. Not all banks will allow you to choose, but it doesn't hurt to ask.