- Who determines the market value of a property?
- What is an appraisal?
- Why get an appraisal?
- What are appraisal methods?
- Who owns the appraisal?
- Can another mortgage company be used after the completed appraisal?
- How can I assist the appraiser?
The property seller sets the price, especially for residential property, not the appraiser. Sellers usually don't order an appraisal because they want to obtain the highest price for their home and therefore don't want to be bound by the appraiser's assessment.
The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an appraiser's License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller based on the CMA, however, the seller may choose to list their property for a higher price.
Regardless of the price at which the seller lists the property, an objective, unbiased value of the property will be needed by the lender. This is where an appraisal comes in.
An appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The appraisal is performed by an "appraiser" typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.
Obtaining a loan is the most common reason for ordering an appraisal. However, there are other reasons to get one:
- Contesting high property taxes
- Establishing the replacement cost for insurance purposes
- Divorce settlement
- Estate settlement
- Negotiating tool in real estate transactions
- Determining a reasonable price when selling real estate
- Protecting your rights in an eminent domain case
- A government agency requirement
- A lawsuit
There are three common approaches, or methods, used by appraisers to establish property value. After reviewing the result of each of the three methods, a final valuation is entered by the appraiser. For single-family, owner-occupied properties, the Sales Comparison Approach is by far the most-used method.
- Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
- Sales Comparison Approach – The appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
- Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods
Technically, the mortgage company owns the appraisal even though the borrower paid for it. This is because the mortgage company orders the appraisal on the borrower's behalf, and the appraiser lists that mortgage company on the report. Under Federal law, the borrower has the right to receive a copy of the appraisal report (usually delivered as a PDF).
Short answer: Yes, usually. In most cases, you will not have to pay for another appraisal if your loan application is moved to another lender. Depending on the type of loan program, the first lender can transfer it to the new lender. Some appraisal firms may charge a small fee due to a little clerical work required to reflect the new mortgage company. If the appriasal is completed and you subsequently change the type of loan program for which you are applying (e.g., was conventional loan then changed to an FHA loan), you could pay a smaller fee for the appraisal to be usable for the new program. In some cases, however, you might have to pay for a new appraisal.
If asked, it's to your advantage to help the appraiser perform the assessment by providing additional information:
- What is the purpose
- Is the property listed for sale, and if so, for what price and with whom?
- Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what interest rate, or
other typeof financing?
- Are any personal properties or appliances included in the property?
- With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.
- Provide a copy of the deed, survey, purchase agreement, or additional property papers.
- Provide a copy of the current real estate tax bill, statement of special
assessments,or balance owed on anything, i.e. sewer, water, etc.
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