An appraisal is a professional appraiser’s opinion of value. This opinion is based on pertinent research into recent market data. An appraisers’ professional opinion arises out of a formal process using three common approaches to value.

The three approaches are the Cost Approach, the Sales Comparison Approach, and the Income Approach. The Cost Approach determines the cost to replace the improvements, less physical deterioration and external factors, plus the land value. The Sales Comparison Approach compares the subject property to other similar, nearby properties that have recently sold. The Sales Comparison Approach to appraising is often the most accurate and best indicator of value for a residential property. As a result, it is the most widely used. The last approach, the Income Approach, is of most importance when appraising income producing properties such as rentals or non-residential spaces. This approach involves estimating what an investor would pay based on the income produced by the property.

An appraiser provides a professional, impartial, and unbiased opinion of market value. Appraisers present their formal analysis in the form of a written or an oral appraisal report.

There are many reasons to obtain an appraisal with the most common reason being real estate and mortgage transactions. Other reasons for ordering an appraisal include:

Although an appraiser inspects the properties he/she will appraise, the appraiser is not a home inspector. The inspection that an appraiser performs is focused on the type of materials used as well as the “visible condition” that comprises the subject property. An appraiser is not required and most often, not professionally trained, in the more in-depth inspections performed by a home inspector. A home inspection is a third-party evaluation of the accessible structure and mechanical systems of a house, from the roof to the foundation. The standard home inspector’s report will include an evaluation of the condition of the home’s heating system, central air conditioning system, interior plumbing and electrical systems; the roof, the attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.

Simply put, the difference is night and day. The CMA relies on vague market trends. The appraisal relies on specific, verifiable comparable sales. In addition, the appraisal looks at other factors like condition, location and construction costs. A CMA delivers a ”ball park figure.” An appraisal delivers a defensible and carefully documented opinion of value.

But the biggest difference is the person creating the report. A CMA is created by a real estate agent who may or may not have a true grasp of the market or valuation concepts. The appraisal is created by a licensed, certified professional who has made a career out of valuing properties. Further, the appraiser is an independent voice, with no vested interest in the value of a home, unlike the real estate agent, whose income is tied to the value of the home.

Each report must reflect a credible estimate of value and must identify the following:

In communicating an appraisal report, each appraiser must ensure the following:

Most states require that real estate appraisers are state licensed or certified. The state licensed or certified appraiser is trained to render an unbiased opinion based upon extensive education and experience requirements. To become licensed or certified, appraisers must fulfill rigorous education and experience requirements. In addition, appraisers must abide by a strict industry code of ethics and comply with national standards of practice for real estate appraisal. The rules for developing an appraisal and reporting its results are insured by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).

Regulations regarding licensing and certification of Real Estate Appraisers vary from state to state. However, licensing and certification is most often associated with many hours of coursework, tests and practical experience. Once an appraiser is licensed, he or she is required to take continuing education courses in order to keep the license current.

Typically, appraisers are employed by lenders to estimate the value of real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases, tax matters and investment decisions.

Gathering data is one of the primary roles of an appraiser. Data can be divided into Specific and General. Specific data is gathered from the home itself. Location, condition, amenities, size and other specific data are gathered by the appraiser during an inspection.

General data is gathered from a number of sources. Local Multiple Listing Services (MLS) provide data on recently sold homes that might be used as comparables. Tax records and other public documents verify actual sales prices in a market. Flood zone data is gathered from FEMA data outlets, such as a la mode’s InterFlood product. And most importantly, the appraiser gathers general data from his or her past experience in creating appraisals for other properties in the same market.

Anytime the value of your home or other real property is being used to make a significant financial decision, an appraisal helps. If you’re selling your home, an appraisal helps you set the most appropriate value. If you’re buying, it makes sure you don’t overpay. If you’re engaged in an estate settlement or divorce, it ensures that property is divided fairly. A home is often the single, largest financial asset anybody owns. Knowing its true value means you can the right financial decisions.

PMI stands for Private Mortgage Insurance. It insures a lender against loss on homes purchased with a down-payment of less than 20%. Once equity in the home reaches 20% you can eliminate the PMI and start saving immediately. For a detailed discussion of PMI and how to get rid of it click here: What is PMI and how to get rid of it?

The first step in most appraisals is the home inspection. During this process, the appraiser will come to your home and measure it, determine the layout of the rooms inside, confirm all aspects of the home’s general condition, and take several photos of your house for inclusion in the report. The best thing you can do to help is make sure the appraiser has easy access to the exterior of the house. Trim any bushes and move any items that would make it difficult to measure the structure. On the inside, make sure that the appraiser can easily access items like furnaces and water heaters.

The following Items, if available, will help your appraiser to provide a more accurate appraisal in a shorter period of time:

Market value or fair market value is the most probable price that a property should bring (will sell for) in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised; (3) a reasonable time is allowed for exposure to the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

In most real estate transactions, the appraisal is ordered by the lender. While the home buyer pays for the report as part of the closing costs, the lender retains the right to use the report or any information contained within. The home buyer is entitled to a copy of the report – it’s usually included with all of the other closing documents – but is not entitled to use the report for any other purpose without permission from the lender.

The exception to this rule is when a home owner engages an appraiser directly. In these cases, the appraiser may stipulate how the appraisal can be used; for PMI removal, or estate planning or tax challenges, for example. If not stipulated otherwise, the home owner can use the appraisal for any purpose.

There are three approaches to value that can be used in an appraisal report. The appraiser will choose the approach(es) that best reflect the actions of buyers in the market area where the property being appraised is located.

The three approaches are:

• Sales Comparison Approach to Value. This method of deriving value allows for the most complete satisfaction of the tenets of market value. It compares sales of properties similar to the property being appraised with the intention of producing a value that reflects the actions of recent market participants that may have considered also purchasing the subject property, had it been for sale. The significant majority of the time, this is the approach used for appraisals of single family residences and condominiums in Southern California where sales and information regarding the sales are usually plentiful.

• Cost Approach to Value. This method of deriving value calculates the cost of a property’s improvements, less depreciation, and adds them to the value of the land as if vacant. Market participants usually make their purchasing and selling decisions based on what properties have been selling for in the area and not on the cost of a property resulting in market value often being significantly different than what is derived in the sales comparison approach to value. The cost approach to value is usually the best option when sales are extremely scarce, which is uncommon in Southern California.

• Income Approach to Value. This method of deriving value utilizes the income capabilities of a property to derive a property’s market value. In Southern California, property values are often too high and investors/landlords will not see enough profit / reasonable enough of a return from rents to where buying a property based solely on its income producing capabilities equals a value above what the sales comparison approach usually indicates, making it an unreliable indicator of market value for single family residences and condominiums where potential investors are mostly competing with buyers who will live in their properties after purchase and do not consider the profit they could receive from renting their property. The income approach is most usually used for multi-family properties and commercial properties.