Appraising 101

What to Expect During the Appraisal Inspection

Every appraiser has their own way of doing things. Compline Group appraisers will usually come to the door and introduce themselves first, then measure the outside of the home. It helps if you open garage doors and patio gates so the appraiser can get all the way around the house. If you have dogs, introduce us to the dogs before you leave us alone with them!

Once we've measured the outside, we come in and walk through the inside, drawing an interior floor plan and making notes of the features and condition of your home. We usually take interior photographs, so be prepared. By the time we've walked through the house we've accumulated a list of questions to ask you.

If you live in a subdivision where the homeowner association fees are mandatory, we'll need to know how much the fees are and what they cover.

Unless other arrangements have been made, we usually pick up the appraisal fee at the time of the inspection.

The appraisal inspection usually takes between 30 and 60 minutes, depending on how complex your house is and how much thorny landscaping you have next to the house. Please remember that the time we spend in your home is only a small amount of the time that goes into preparing your report. Before we come to your house, we've already spent a considerable amount of time looking up plat maps, zoning maps, flood maps, and public records. We also look for all the recent sales in the area, and homes that are currently listed for sale.

After we're done inspecting your property we drive around your neighborhood, looking at homes that have sold recently. Then we go back to the office, analyze the data, and pull it all together into report form. The actual appraisal inspection is the least time-consuming part of the whole process.

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So, How Much is it Really Worth?

If you want to see an appraiser cringe, tell them "I had an appraisal done a couple of years ago. They came in at (enter exhorbitant dollar amount here, definitely out of line with the current market), but I don't have the report..."

Why is this a problem? Because without the report, we have no idea what the previous appraiser did. Or why. We can't tell if:

a) you're remembering correctly
b) the appraiser was asked to appraise the home subject to an addition which never got built
c) the appraiser did a driveby appraisal, and your house looks ok from the street but it's been gutted inside
d) the appraisal was fraudulent.

Or maybe the market changed and the value of your house actually went down. It happens. So how does an appraiser determine the value of your home? Basically, there are three ways to do this:

The Cost Approach

The Cost Approach estimates the cost of reproducing your home on the same site given current construction costs, and then depreciates it for aging and other factors. This approach works well for relatively new homes, but it can be difficult to determine how much depreciation has actually occurred in older homes.

Even brand new homes can have some depreciation. If a home is drastically overbuilt for an area it is unlikely that the owner of that home is going to recover the full cost of construction, even for a new home. Take the luxury home market, for example. Billionaire A spends $10 million building his dream home, then decides to sell it. He puts it on the market for $10 million, figuring that's a fair price since it's what he's put into the home.

The problem is that his dream home happens to be chartreuse throughout, except for the purple kitchen. It has an olympic sized curling facility which takes up a significant chunk of the back yard, and it only has one bedroom. Sure, it cost $10 million to build, but no one else is going to pay the guy $10 million for it.

This kind of overbuilding is called functional obsolescence, and it's factored into the depreciation of the home in the Cost Approach.

The Market Data Approach

The Market Data Approach is also known as the Sales Comparison Approach. In it, the subject property is compared with recent sales in the area ("comparable sales," or "comps" for short). The more similar the comps are to the subject, the easier it is to determine the subject's value.

For example, House A sold last month at $100,000 and it was 100 square feet bigger than the subject. House B sold for $80,000 and it was 100 square feet smaller than the subject. House C sold for $90,000 and it was just right--the same size as the subject. There were no other apparent differences. So therefore, the subject must be worth $90,000, right?

Well, maybe. In this case $90,000 looks pretty solid, because we're using fake data. In real life there might be three seemingly identical homes and one would sell for $105,000, another for $102,000, and the third for $98,000. Yikes. After a little research, you might find that the $98,000 sale had been vandalized inside and needed work. But what about the other two homes, which really do seem to be identical? And how much is yours worth, since it's the same model?

Answer: It's probably worth between $102,000 and $105,000. If anyone tries to tell you "It's worth $103,872 and not a penny more," get another opinion. No one can figure a market value that accurately. If other sales in the area also support a range of $102,000 to $105,000 and the market hasn't changed since the comparables went under contract, your home will probably sell in that same price range. Where it actually sells depends on how you and the buyer feel during the negotiations. Or maybe it depends on the color of your carpet. If you have pink carpet and the buyer likes pink, they may offer $105,000. If the buyer hates pink they may only be willing to pay $102,000 since they will probably be replacing the carpet. At some point it becomes too subjective to call.

Most people want a specific value when they get an appraisal. This is where the "art" of residential appraising comes into play. Statistical analysis can help to narrow down the range of value. But in the end, the actual number that's placed in the report is the appraiser's judgment call. That's why it's called an "opinion of value."

The Income Approach

The Income Approach applies to investment property. Most investment property is expected to produce a positive cash flow. In the case of residential property, the cash flow comes from rents collected. An appraiser using the income approach will determine the probable income from the property. Then they will apply a multiplier to that income to estimate the amount a typical investor would be willing to pay for the property, given the amount of income it's expected to produce. Multipliers are generated from analyzing sales of similar income properties in the area. It's a complex process that applies more to multi-unit housing, and usually isn't used for valuing single family residences.

The Final Number

Appraisers will usually use all of the applicable methods for determining the value of a property, then reconcile those results into their final "opinion of value". Typically the three approaches to value come up with slightly different numbers. The process of reconciling all of that information into one number is somewhat subjective. The final number should be clearly supported by the different approaches to value, and there should be a good explanation of the appraiser's reasoning in the report.

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Limited Appraisals

Whose Report Is It, Anyway?

You've applied for a loan, you've paid the appraiser out of your own pocket, and the appraiser sends the report to the lender. Worse yet, the appraiser won't give you a copy of the report. You're told to get a copy from the lender. What's going on? Isn't it your appraisal? Why won't the appraiser give you a copy?

Appraisal reports are confidential, and the appraiser is required to maintain that confidentiality. Unfortunately, even though you paid for the appraisal, the appraiser's "client" is typically the lender or mortgage broker who ordered the appraisal. You are entitled to a copy of the report from the mortgage company, but the appraiser can only give the report to their client, regardless of who pays for the appraisal.

Things get especially sticky when you pull the loan from mortgage company A, and decide to go with mortgage company B instead. Usually the appraisal belongs to mortgage company A, even though you were the one who paid for it. So when you tell mortgage company B that you've already had an appraisal done by Appraisers 'R Us, Appraisers 'R Us cannot automatically send that report to the new mortgage company. The first mortgage company must release the report and authorize its transfer to the new mortgage company. It's a hassle, but the appraiser can get in a lot of trouble for releasing a report without authorization.

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USPAP (no, it's not a disease)

Licensed and certified appraisers are governed by the Uniform Standards of Professional Appraisal Practice (USPAP), an imposing document which boils down to: "be competent, be honest, and disclose what you're doing so everyone understands it".

If only it were so simple...

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Appraising vs. Consulting

Appraisers aren't supposed to accept appraisal assignments if payment is contingent on coming up with a certain "value". This means that if your loan doesn't go through because the appraised value of the home is lower than what the mortgage company needed to do the loan, you still have to pay the appraiser.

An appraisal should present a professional, independent, unbiased opinion of value. But some types of assignments require an advocacy position. These are often considered consulting assignments, rather than appraisals.

For example, some appraisers specialize in tax consulting. They defend their client's point of view in order to get the client's property taxes lowered. Payment is often contingent on how much the client saves in taxes. This is clearly an advocacy role, and the tax consultant's position is rarely mistaken for an independent, unbiased opinion of value. As long as the tax consultant's advocacy position is made clear, no one will be misled by his or her actions.

Other forms of consulting are not so clearcut. When a seller asks for an appraisal because they want to put their home on the market, what do they really want? An independent, unbiased opinion of value? Or a puff piece with an inflated number the seller can wave in front of a buyer to say "Here, my house is worth THIS MUCH?" If an appraiser does a puff piece and it looks like an unbiased appraisal they're going to be misleading anyone using the report, which is a violation of their professional standards. A good appraiser won't do a puff piece. They'll give you a solid valuation, with explanations. A really good appraiser will explain the difference before accepting the assignment.

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Common Residential Property Types

Single Family Residences

Single Family Residence (SFR's) are detached homes on a piece of land. The suburbs are full of them.

Patio Homes

Patio Homes are typically detached homes with one or more exterior walls placed directly on the lot line, forming part of the patio wall of the neighboring home. Most patio homes are a form of single family residence. Subdivisions of patio homes are sometimes referred to as "zero lot line" subdivisions. This arrangement can make exterior maintenance tricky if you happen to be squabbling with the neighbors, since you have to access their property to work on your own house. Check the subdivision regulations (CC&R's) carefully, making sure there are adequate provisions for exterior maintenance of the home.

Townhouses

Townhouses share one or more common walls with neighboring units. Townhouses with one common wall are often referred to as "semi-detached", "semi-attached", or "end" units. Townhouses with two or more common walls are also referred to as "attached" or "row" houses. Townhouses typically have small yards which are privately owned. There may or may not be a homeowners association.

Condominiums

Condominiums can range from apartment-like units to fully detached homes. The difference is in the form of ownership. With condominium ownership you own the air space inside the unit, and the interior walls. The exterior of the home and all of the land remains in common ownership.

In the Tucson area it can be difficult to tell a condominium from a townhome, because some townhome complexes have associations that are responsible for all exterior maintenance. To make it even more confusing, the Pima County assessor classifies most of the townhomes as "condominium" regardless of the form of ownership. And the Tucson MLS designates the category as TH/C for "townhouse/condo".

Why does this matter? If it's a townhouse and you own the back yard, you can put an addition back there as long as you get permission from the homeowners' association. On the other hand, if you own a condominium, you don't own your back yard. So even if there's a yard you can use and the association does let you put an addition back there, who actually owns the addition? You or the association? You'd better know before you build it!

One key difference is in the legal description. If the legal description reads: "Lot X of Subdivision Y" it's probably a townhouse. If the legal description says: "Unit X and a 1/(total # of units) interest in the common area" or something to that effect, the unit is most likely a condominium. Especially if the plat for the property is just a footprint of the living unit and doesn't include any yard. Check with a real estate attorney if you're not sure.

Manufactured Homes

Manufactured homes are built in a factory and arrive on wheels. The towing hitch, wheels and axles are often removed when the home is set on the site. The chassis remains as an integral part of the home. If there is going to be a conventional mortgage on the home the hitch, wheels and axles MUST be removed. Foundation requirements vary, depending on the site conditions and local regulatory environment.

Starting in mid June, 1976 the Department of Housing and Urban Development (HUD) began to certify all new manufactured homes built in the United States. Homes built prior to June, 1976 do not have HUD certification, and it can be difficult to obtain financing for these older homes.

HUD certified homes have a HUD label on the narrow end of each section of the home (usually the opposite end from where the hitch was attached). The HUD label is a business card sized metal plate with a number on it. That HUD number begins with three letters, followed by a 5 or 6 place number. It is permanently affixed to the siding and should never be removed. Removing (or permanently covering) the HUD label can make it extremely difficult to get financing for the home.

HUD certified homes also have a "data plate" inside the home. This is a paper sticker, often about 8" x 10", with maps of the United States on it. This data plate should display the manufacturer's name and address, the date the home was built, the serial number of each section, information on the home's insulation and original appliances, and the HUD label numbers. It is often located inside the cabinet door under the kitchen sink, or in a cabinet in the utility room, or on the wall of a bedroom closet. Do not remove these stickers if you can avoid it. The information on them is important for obtaining financing on the home.

Beware of homes advertised as 1976 models. The model year for manufactured homes begins in late summer or early fall. Most of the homes which are 1976 models were built prior to June, 1976. By fall of 1976, most of the homes were being sold as 1977 models even though they were actually built in late 1976. Most 1976 model homes do not have HUD certification.

Modular Homes

Modular homes are built in a factory to Uniform Building Code (site built) standards, and are trailered to the site. They do not have wheels. They can be treated as site built for lending purposes, but their overall character tends to be similar to that of a manufactured home. It can be difficult for an untrained person to tell the difference between manufactured and modular homes.

Prefabricated Homes

Prefabricated homes are built in sections in a factory, and assembled on the site. Sears used to sell a lot of them. Prefabricated homes are considered site built homes for lending purposes. Quality of prefabricated homes varies with the skills of whoever did the final assembly and finish work.

1-4 Family Residential Income Property

Although they are called "1-4 Family", residential income properties usually have 2-4 units and are referred to as "duplexes", "triplexes", or "fourplexes", depending on how many units they have. Anything with 5 or more units is considered commercial property.