Appraisal 101 | United States | Jorgensen Residential Appraisal

Appraisal FAQ

1. How is an appraisal different than a home inspection?

Home inspectors conduct most of their work at the inspection. Appraisers do most of their work at their desk. Home inspectors make detailed inspections of electrical, plumbing, HVAC and structural systems. Appraisers measure the home and make a cursory inspection of the interior and exterior of the home. An appraiser’s primary objective is to determine value. A home inspector’s primary objective is to determine the condition of the home’s primary systems. An appraiser notes the home’s condition based on a cursory inspection and considers it in the value opinion, but relies on other experts, such as home inspectors, when it comes to more detailed information about the home’s systems.

2. How is an appraisal different from a comparative market analysis (CMA)?

Most real estate agents are not appraisers, so they can not legally do appraisals. However, they are allowed to perform CMA’s in the normal course of business, such as when listing a home for sale. CMA’s are not bound by the same rules as appraisals, such as being non-biased, having supported adjustments, being based on a market value definition that includes the terms; “most probable price”, etc. Appraisals are performed by appraisers who have undergone extensive training and have extensive experience, so are generally more detailed and accurate than CMA’s.

3. Who are an appraiser’s customers/clients?

It is generally the person who hires the appraiser. That gets a little tricky for lender assignments where the lender is technically the client. So, in those situations, the appraiser is not generally able to talk about value or provide the appraisal to the borrower, even though the borrower likely paid for the appraisal. Fortunately, it is standard practice for the lender to give the borrower a copy of the appraisal. After the lender has provided the borrower a copy of the appraisal, the appraiser is better able to talk about the appraisal. Even when the appraisal is not for lending purposes, the appraiser usually does not talk about the value with any party until after the appraisal is completed. That is a safety precaution that insures all the proper research and analysis are completed before a value opinion is presented to the public.

4. What data sources do appraisers use?

Appraisers use public and private data sources for plat maps, property information, such as year built and legal descriptions, floor zone status, etc. The multiple listing service (MLS) is especially helpful for comparables (comps) as it usually includes many photos of the comps and detailed property information. Cost manuals are relied on for cost estimates. Other information comes from field inspections of the subject and comps.

5. Which home renovations add the most value?

Kitchens and bathrooms are typically the most valuable areas of a home, so updating these generally adds the most value. However, the most “bang for the buck” generally comes from new carpets and paint. We can help you with more specific information for your situation as most improvements do not bring a full return on investment.

6. Why is the appraised value often similar to the sale price?

For purchase transactions, the appraised value is often near the sale price because most buyers pay a reasonable and fair price. For most transactions an agent is involved and buyers and sellers are involved. The interaction of these parties and the fact that most buyers see several properties before buying a home, generally leads to a reasonable sale price. There are exceptions to that and those are generally the situations where the appraisal does not come in near the sale price. Some of the situations where the appraised value may not be near the sale price are when the buyer or seller are highly motivated or when the parties are related. When a home is appraised for a purchase transaction, the subject is considered its own best comp. That means of all the available comps, none are better than the subject itself, so the subject’s transaction is given a lot of weight in the final analysis and opinion of value.

Appraisal 101

What is a real estate appraisal?

Technically, an appraisal is the process of developing an opinion of value. However, “appraisal” often refers to an appraisal report.

What is an appraisal Report?

Appraisal reports generally describe the property, neighborhood, market, highest and best use and include one or more approaches to value, a reconciliation and final value opinion.

What is an approach to value?

The three most common approaches to value are the sales comparison approach, cost approach and income approach.

What is the sales comparison approach?

This is the most common approach to value for residential real estate. This approach usually includes a grid or spreadsheet with the subject in the far left column and comps and adjustments in columns to the right of the subject.

What is a comp?

A comp or comparable is a sale of a property that is similar to the subject in as many features and characteristics as possible, including location, size, view, etc. Because it is rare to find comps that are identical to the subject, the comps should bracket the subject's important features when possible.

What is bracketing?

Bracketing means some of the comps are superior and some are inferior in a particular feature. This prevents skewing. For example, if a subject property includes a two acre parcel of land and no comps are available with two acres, then some of the comps should have smaller parcels and some should have larger parcels.

What is skewing?

Skewing means the results are pushed one way or the other due to unbalanced data. That is more likely when the comps do not bracket the subject.

What are adjustments?

In the sales comparison approach, adjustments are made when there are significant differences between the subject and a comp. For example, the subject has 1,000 square feet and the comp has 1,200 square feet of living area, so an adjustment in a dollar amount is made to the comp's sale price to make the comp more comparable to the subject. Adjustments can be positive or negative depending on whether the comp is superior or inferior to the subject.

How do you know how much to adjust?

There are many techniques available to support adjustments in the sales comparison approach. The two most common are "paired sales analysis" and "regression analysis". Paired sales analysis is the oldest and most recognized appraisal technique for supporting adjustments and is generally considered the gold standard, but in recent years regression analysis has gained popularity because true paired sales analysis is often not possible. For a more detailed discussion on adjustments, please see the blog post on this subject on this website.

What is regression analysis?

Regression analysis is a statistical process of estimating the relationships among variables. In layman's terms and relating to appraisals and adjustments, regression uses mathematical algorithms to determine the value of particular features, such as pools, lot size, etc.

What is paired sales analysis?

In the strictest sense, paired sales analysis determines the value of a particular feature by comparing two properties that are identical in every way, except for the feature in question. For example, property A and B are identical in every way, except that property B has a fireplace and property A does not. Property B sold for $2,000 more than property A, so the value of the fireplace in this example is extrapolated to be $2,000. Because ideal paired sales are rarely available, a modified form of this method is generally employed.

What is the cost approach?

The cost approach estimates the cost to rebuild the subject, plus land value and site improvements and deducts for depreciation/obsolescence.

What is depreciation/obsolescence?

There are three main types; first, physical, second, functional and third, external.

What is physical depreciation?

Physical depreciation relates mostly to “wear and tear” or the aging of physical features.

What is functional obsolesce?

This most often relates to poor design. For example, it may be necessary to go through one bedroom to get to the next bedroom, etc.

What is external obsolescence?

This relates to negative features external to the subject property. Being near railroad tracks is an example of this.

What is the income approach?

This is most applicable to income producing properties like rentals. In this approach, a gross rent multiplier (GRM) is often used to value the subject property. The indicated GRM of the comps is based on the sales price divided by the gross rent. For the subject, the GRM x gross rent = indicated value. The GRM for the subject is based on a reconciliation of the GRM's for the comps.

In an appraisal, what is a neighborhood?

When people talk about their neighborhood, they are generally referring to a small area in the immediate vicinity. This is sometimes referred to as the immediate neighborhood in appraisals. Ideally, the comps used in an appraisal would all come from this area. However, immediate neighborhoods are often too small for an adequate number of comps, so it may be necessary to go to the larger or general neighborhood for at least some of the comps. The neighborhood section of the appraisal report generally refers to the general neighborhood. This is a larger area where reasonably similar properties can be found.

What is a market?

There are many different types of markets, such as the national housing market, local rental market, etc. Every property is part of a particular segment of the market. The subject's segment of the market is based on the types of buyers and sellers in that market. The size and price of a property, as well as its location and other characteristics determine which segment of the market the subject best fits in.

What is the highest and best use?

This is the physically possible, financially feasible and legal use that brings the greatest return. For example, the highest and best use of a home on a large lot may be to split the lot if it is legal, feasible and possible.

What is reconciliation?

The reconciliation in an appraisal determines which comps and which approaches to value have the most relevance. The reconciliation is used to determine the final value opinion or market value for the subject.

What is market value?

There is more than one definition of market value, but most include some or all of the following:

The most probable price, where buyer and seller are acting prudently and in their best interest, are typically motivated and are not under duress.

801-651-6575

Salt Lake/Utah/Davis Counties
ValueUT@gmail.com

801-651-6575

Salt Lake/Utah/Davis Counties ValueUT@gmail.com

Salt Lake/Utah/Davis Counties
ValueUT@gmail.com