The Appraisal Process

Have you ever wondered what happens in the appraisal process, or why appraisers do things a certain way? This post will help you understand the appraisal process from beginning to end, including appraisal assignment, the different kinds of research an appraiser does, inspection types, sections in an appraisal form, and the review process.

How is an Appraiser is Chosen?

The process of choosing an appraiser is different depending on who the client is. For non-lender assignments, the appraiser is generally contacted directly by the client. For lender assignments, the lender may work through an appraisal management company (AMC). For these assignments, the AMC orders and manages the appraisals. There is a misconception that lenders are required to use AMC's, but that is not the case. Lenders can order appraisals directly as long as there is a firewall between the loan officers, other commissioned personnel, and the appraisal panel. This is often done by having a separate appraisal department that orders and manages appraisals.

Before an appraiser is considered for an appraisal assignment, they are required to be on the list of preferred appraisers for each lender (banks or credit unions) or AMC they desire to receive work from. To be on the list, each lender or AMC has a different approval process. This usually includes sample appraisals, resume, etc. Sometimes appraisers are handpicked for an assignment based on their qualifications and areas of expertise. Other times, appraisers are invited to bid against each other to see who can complete the appraisal fastest and at the lowest cost.

Appraisers can also complete appraisals for individuals, real estate agents, lawyers, the government, and other institutions. Appraisals are not limited to bank work. A large part of appraisal clients come through referrals, so it is important for the appraiser to always produce quality reports.

What Research is Necessary?

When an appraiser receives a new assignment, they know very little information about the subject property. Appraisal orders often come only with an address, a due date, and a contact to make the appointment with. This is when the research process begins.

Appraisers use a variety of sources to make sure the information they receive is accurate. They look through tax data, listings, listing history, plat maps, zoning requirements, public records, and other databases that contain assessor information and appraisal data. These sources do not always have a lot of information about properties, especially when they are new, high end/custom, or have never been listed for sale. Often, the most useful part of the research process is when an appraiser can speak with home owners about the features, upgrades, renovations/updates, and overall quality of their homes. Through a combination of all of these sources, an appraiser is able to begin to piece together what makes each home unique.

What Happens at the Inspection?

Inspections differ based on the type of appraisal ordered. The most common includes an interior and exterior inspection with photos of most rooms, the home's exterior and street scenes. These inspections also include measuring, sketching the home, and calculating the square footage. The appraiser also asks more questions about any features and updates they notice. These inspections usually last around 30 minutes to an hour depending on the size and complexity of the home. This is where an appraiser verifies any information they have received during the research process.

Other appraisals require the interiors and exteriors of the home be inspected and photographed, but no measurements are required. In these cases, the public records are relied on for the square footage. Inspections are a little shorter for these assignments.

In other cases, an appraiser is hired to complete an exterior-only appraisal. These only require a drive-by inspection, which is a front exterior inspection from the street. When this is the case, the appraiser does not set an appointment because they are only required to see the front of the home and the subject’s neighborhood. These appraisals rely mostly on public records and MLS data for information about the home.

There are also desktop appraisals which are done completely from the office. There is no inspection required. These appraisals are designed to be done at the desk, hence the name desktop. For these assignments, subject information is obtained from public records, MLS data, and Google Maps.

There is a place for each of these appraisal types, but appraisals with full inspections and measurements provide the most detailed information and most refined appraisal results. When an appraiser sets an appointment, they clarify which type of inspection they will be completing.

What about Comparables?

One of the most important parts of the appraisal process is choosing comparables. A comparable or comp is a sale of a home that is similar to the subject. The more similar the comparable is to the subject's size, quality, condition, location, etc., the better the comparable.

After comparable properties are found, verified and inspected, the appraiser adjusts for the differences (look at our blog post: “The Art of Adjustments for a more detailed explanation of adjustments). Through adjustments, the subject's significant features are accounted for.

What about the Cost Approach?

Another method for determining market value is through the cost approach. The cost approach estimates the cost to rebuild the subject, plus land value and site improvements, then deducts for depreciation and/or obsolescence.

The cost approach is usually given secondary consideration to the sales comparison approach, but does help to confirm the validity of the appraisal results.

What is Reconciliation?

The reconciliation process is where the appraiser weighs the strength and weakness of the data, comps and approaches to value (i.e. cost approach, sales comparison approach, etc). More weight is given to the more similar comps and the most applicable approach to value. Reconciliation is where the final value opinion is determined.

What happens after the Appraisal Report is Turned in?

Non-lender appraisals are sent directly to the client, but appraisals used for lending purposes often pass through many hands before reaching the borrower. In these cases, appraisals first must pass the review process of the AMC, bank appraisal reviewers, and underwriters. When errors are found, or clarifications are needed, the report is sent back to the appraiser for correction. Only after the appraisal passes the review process is the appraisal used by lenders.

What if the Borrower Disagrees with the Appraisal Results and/or

Methodology?

Many lenders have a reconsideration of value (ROV) process. That is where the borrower can contest the appraisal. Most lenders review the ROV before sending to the appraiser to make sure it is justified. The ROV should include reasoning and support for why they disagree with the appraisal. For example, if the borrower believes the comps are not reasonable, then new, better comps should be provided. Appraisals with comps that are less than ideal may or may not be reasonable, depending on what other comps are available. Adjustments that are well below the cost of the particular features may or may not be reasonable, depending on what the market data supports. Most ROV's do not result in a different value opinion because most appraisals include reasonable support, but in some cases the ROV reveals new information that does result in a different value opinion.