When you get right down to it, the process of appraising property really isn't that complex.
But, still, many home sellers -- and buyers -- don't thoroughly understand just what an appraisal is, why it's important, or how it differs from a Realtor's home market analysis or a home inspection.
"An appraisal lets us know how much the market tells us a house is going to sell for," said Mark Borowy, owner of Fallston's Kipper Appraisals. "There is a big misconception that the appraised-for price and the sell-for price are two different things, when in fact, they should be the same."
"An appraisal is the estimate of the fair market value of a house at a given time," said Arthur Davis, president of Chase Fitzgerald and Co. and a member of the executive committee of the National Association of Realtors. "It's the price a willing buyer and a willing seller would agree upon, if fully aware of all market conditions and conditions affecting the property."
The key in determining the value of a home requires the expertise and experience of someone with no loyalty to either side, and someone who carries the designation of Independent Fee Appraiser.
"The title implies that appraisers are independent of real estate companies and are completely nonbiased," Davis said. "Their fee is independent of the sale price and is based on the number of hours it takes to do the job."
And, in Maryland, appraisers must be licensed by the Commission for Occupational and Professional Licensing.
While Davis -- a Realtor, but not a licensed appraiser -- could most likely give a fairly accurate appraisal of a property, his opinion might be challenged in court. He's not licensed, and lenders, for example, want the added degree of protection a license provides.
Many times when a Realtor goes to a potential seller's home, he or she will come armed with what's called a market analysis. Within that analysis, the Realtor usually will present a list of nearby similarly styled homes that have settled so that the home seller will have a better idea as to how to price the property when it goes on the market.
"A Realtor might be inclined, from time to time, to give a seller an opinion as to the value of a house, but if the seller believes he can get considerably more money, then the seller should get an appraisal," Davis said.
Typically, a lenders' appraisal will cost between $300 and $500. Clearly, an estate will require more time and cost more, and often for larger properties, when more money is at stake, lenders may require more than one appraisal.
"Custom-made, oddball houses are hard to assess, because there's not a lot of other like houses to compare them to," said Accubanc Mortgage's John May. The same is often true for waterfront properties, because appraisers usually have to drive greater distances to track down similar properties.
But in general, appraising a home can be considered a science. It's research, hard numbers and sales figures with a bit of art and nuance thrown in.
Carolina Hill Cronin, of Timonium's Hill Realty Appraising Inc., acknowledges, "You do get a feel for appraising, a feel for the way general values are going, after a while.
"You can't be swayed either way, but do have to think, 'If I was buying this house, how much would I pay?' You don't want to either overvalue or undervalue a house."
Like the Realtor's market analysis, Cronin begins the appraisal process by gathering information about all recent -- preferably within the past six months -- sales in a given area, as well as what properties are listed, what properties are under contract (meaning that a settlement is pending) and what properties have been taken off the market.
Accubanc Mortgage's John May collects such information from the Metropolitan Regional Information System (MRIS), the multiple list system used primarily by Realtors. "You want to look at the whole picture, want to see a deed, get information about ground rents, homeowner association fees, and a copy of the location survey," he added.
May also incorporates when the home was first purchased and what improvements the homeowners have made over the years.
The next step is visiting the property.
Cronin takes along a detailed Uniform Residential Appraisal Report approved by Freddie Mac, the giant mortgage institution where many lenders get their funds. Much of this form she fills out as she surveys the inside and outside of the property, but some parts must be completed back at the office.
The form is divided into four basic sections. They are: general description of the property; cost approach (used mainly for valuing newer properties); sales comparison approach to valuing the property; and income approach (which typically applies only to commercial or income-producing properties).
She will compile myriad details about the home including: location, dimensions, general description, exterior description, foundation, basement, rooms, energy-efficient features, adverse environmental conditions, or the lack thereof. Cronin also notes any deficiencies. "For an FHA appraisal, you must note anything that would be hazardous, like peeling paint," she said. "You look for damage from water leaks or evidence of water in the basement."
Davis said that if appraisers see something that's questionable, such as water penetration through the roof, they will stipulate that a roofer be called to check the state of the roof as a condition of the appraisal.
May also looks for major defects and at other details. "And, I compare the property to the rest of the neighborhood."
Appraisers also include a building sketch -- essentially a detailed floor plan of each level, with specific dimensions -- and photos of the property, the street and comparable houses in the neighborhood.
Crucial to determining an appraisal price are "comparables," or similar homes in the neighborhood. After the on-site inspection, appraisers will use six to 10 comparables -- houses that have settled within the last six months. They then compare size, functional utility, number of rooms and design before arriving at an appraisal price.
It's important to appraisers that they are, as much as possible, comparing apples with apples when setting an appraisal price.
Another factor that affects an appraiser's final figure is location. "Location is the primary factor in appraising real estate," May said. "But the value of location changes from person to person."
Indeed, location can be a subjective consideration.
A home in a superior school district may be of considerable value to those with children, and of no use whatsoever to empty-nesters. Similarly, the perfect house in a neighborhood that's a one-hour commute from one's perfect job may hold little interest to someone who hates to drive.
Sellers can also find that their home improvements may not add as much to the value of their home as they had hoped. "There's a gray area in appraising for upgrades and for additions," May said. "What may be nice for the owner may not be good for the market, and an appraiser has to make reasonable adjustments."
A swimming pool that cost the owner $40,000 will clearly add value to a property. But it may very well not be $40,000 worth of additional value. "Sellers must have a realistic expectation of what their house is worth," May said. "People automatically assume that their real estate has gone up in value, and that's not always the case."
After an appraiser such as May has completed the work and submits it to a lending institution, the appraisal goes to the institution's underwriting department, which may either accept or reject the price.
If a lender rejects one appraiser's decision, often another two appraisals will be requested. Then it's usually a matter of taking the two (of the three) appraisals that are closest and averaging them to determine the appraisal value.
For those who are considering putting a home on the market, Davis of Chase Fitzgerald & Co. offers this advice. "There's a distinct advantage to getting an appraisal done before even contacting a real estate agent," he said. "Brokers may be optimistic about selling price, yet an appraiser is more likely to be realistic.
"And a broker may come in and give a value that is more than the house is worth in order to get the listing."
For mortgage purposes, the appraisal is critical to the success of the transaction.
If the sales price of a home is higher than an appraiser's figure, a lending institution will lend money based only on the appraised value, not the sales price.
For example, if the sales price of a home is $110,000 and the appraisal comes in at $100,000, on a conventional 95 percent loan, the bank would only lend $95,000 instead of the $104,500 based on the sales price. Consequently, a renegotiation must occur between buyer and seller.
To remedy the situation, the buyer -- instead of needing a $5,500 down payment -- would have to increase his down payment to $15,000. Or the seller, would have to lower the sales price to the appraised figure.
For conventional loans it's up to the parties to find a solution. In the case of an FHA loan, the options are defined in the sales contract and, if a buyer decides not to increase his down payment, he can withdraw from the contract without penalty or loss of money.
Conversely, if an appraisal comes in higher than the sales price, the lender will use the lower of the two in making a loan.
In any event, "an appraisal [before listing a house] will give the seller reassurance," Davis said, "and peace of mind."
The making of an appraiser
In Maryland there are three categories of appraisers: licensed, certified residential and certified general. Each category is tied to a type of property and a maximum value.
To be eligible to take the three-hour licensing exam, an individual must work a certain number of hours with a professional $H appraiser. The three degrees are: 2,000 hours (licensed); 2,500 hours with at least two years of experience (certified residential); and 3,000 hours with 2 1/2 years of experience (certified general).
Also required before taking the test are between 90 and 180 hours of classroom education, including real estate courses, sales comparison approach, highest- and best-use analysis; legal considerations in appraisal; and income approach to appraising.
A license is good for three years. To keep it active, appraisers must meet continuing-education requirements.
Appraisers are subject to regulatory control and can be reprimanded or suspended, or have their licenses revoked by the commission, which received 32 complaints last year, according to the state Commission for Occupational and Professional Licensing.
Currently, Maryland has 446 licensed, 353 certified residential and 363 certified general appraisers.
Appraisals vs. assessments
Many people get confused about an assessment and an appraisal, and about how a Realtor fits into the mix, said Arthur Davis of Chase Fitzgerald & Co. But keeping everything clear is actually fairly straightforward.
An assessment, which only covers the exterior of the building, is done by the Maryland Department of Assessments and Taxation, primarily to determine property taxes. "Assessments are done more or less in bulk," Davis said. "An assessor will start by gathering specifics on neighborhoods and will use the technique of mass appraisals.
"But, a true appraisal is individual to a specific property, includes an inspection of the exterior and interior of the property, and will take into account improvements the seller has made," he said. "It will take comparable sales over the past six months into account."
The dollar amount that's set by an appraiser will be the figure used by banks and mortgage companies to make loans or refinance homes, as well as by courts.
A Realtor is licensed by the state to sell property and may have an unofficial opinion about the value of a home, but he is not licensed to appraise that property. And, neither appraisers, assessors nor Realtors are licensed to give home inspections.
Pub Date: 3/15/98