PART ONE – THE APPRAISAL PROFESSION
I. The Appraiser’s Work
A. The professional appraiser estimates the value of real property (land and/or buildings).
B. An appraiser’s estimate of a property’s value usually is in writing, and may be a letter simply stating the appraiser’s value estimate.
C. The longer, more extensive document is called an appraisal report.
D. The appraiser needs some of the expertise of the following professionals in order to formulate an accurate evaluation of a property:
· Surveyor
· Builder
· Real estate broker
· Accountant
· Economist
· Mortgage lender
E. An appraisal takes into account the many factors that influence a property’s value.
II. Qualifications of an Appraiser
A. The real estate appraiser’s primary qualifications are education and experience.
B. Education – a broad array of educational opportunities are available to the appraiser including colleges, private schools, professional organizations and real estate schools.
C. An appraiser needs to have knowledge of many fields in order to effectively apply appraisal techniques. Appraisal involves a great deal of judgment, and the more an appraiser knows about various aspects of a property, such as the economic attributes as it relates to accounting, the significance of city planning, its construction, etc.
D. Experience – In most states, the novice appraiser will begin as a trainee under the direct supervision of a certified appraiser.
E. Objectivity – Even though many calls in appraising involve subjective opinions of the appraiser, the appraiser must remain objective in considering all factors relevant to the appraisal assignment. Any personal interest in the outcome of the appraisal must be revealed to the client, as indicated by USPAP standards. It is best if the appraiser avoids any assignment that could create the appearance of impropriety.
F. An appraiser’s main credential will ultimately be the expertise that comes with performing numerous appraisals. It is also important to keep up with the latest developments in the field and to read appraisal and related publications, as well as attend various seminars and courses.
III. Assignments Available
A. In a real estate transaction involving either the sale or lease of real property, an appraisal may be desired to:
· help set the seller’s asking price
· help a buyer determine the fairness of an asking price
· set a value for real property when it is part of an estate
· estimate the relative values of properties being traded
· set value on property involved in corporate mergers, acquisitions, liquidations, or bankruptcies
· determine the amount of a mortgage loan
· set rental rates
In addition, other uses of real estate requiring appraisals include:
· determining building insurance value
· determining the effect on value of construction defects as part of a legal proceeding
· determining property losses due to fire, storm damage, earthquake, or other disaster
· assessing property for taxes
· setting gift or inheritance taxes
· estimating remodeling costs
· valuing property as part of a marital dissolution
· valuing property in an arbitration of a dispute
· determining development costs
· discovering a vacant property’s most profitable use
· ascertaining whether the present use of a property is its most profitable use
· establishing a value for property in a condemnation proceeding
IV. Employment Opportunities
A. The appraiser may be self-employed, working as a sole practitioner, or perhaps using the services of a staff of other appraisers.
B. A few appraisal companies have offices in major cities coast to coast, employing the services of hundreds of appraisers.
C. Large industrial organizations and chain stores hire appraisers to serve their real estate departments by inspecting and judging the condition of land and buildings before entering into a purchase or lease agreement.
D. If the appraisal will be used as part of a federally related transaction, the services of a licensed or certified appraiser will probably be required.
E. Some states require that all appraisers be licensed or certified – even for transactions that are not federally related.
V. Appraiser Compensation
A. The majority of real estate appraisals are market valuations of single-family homes, and are performed by self-employed appraisers.
B. A self-employed appraiser works a specified fee and is usually hired by a lender.
C. Becoming more common, the appraiser may be hired by an appraisal company that contracts with the lender or other client to provide appraisal services as needed.
D. Fees are based on the time required to complete the appraisal process and report, but are always negotiable.
E. Fees are subject to a balance between the appraiser’s overhead and expenses on one hand, and market competition on the other hand.
F. Under no circumstances should the appraiser’s fee be dependent on the final opinion of value, to avoid even the appearance of a conflict of interest.
VI. Licensing and Certification
A. The Great Depression of the 1930s gave birth to both the Society of Residential Appraisers as part of the United States Savings and Loan League, and the American Institute of Real Estate Appraisers under the auspices of the National Association of Real Estate Boards (now the National Association of Realtors).
B. The 1980s brought much economic upheaval that contributed to the collapse of many savings and loan institutions, which led to the licensing of real estate appraisers.
C. Besides economic troubles, sometimes outright fraud in the preparation of real estate appraisals contributed to the savings and loan crisis.
D. Before the savings and loan crisis, very few states required licensing or certification of real estate appraisers. The federal government was about to change that.
VII. FIRREA
A. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established the RTC (Resolution Trust Corporation) to take over, for sale or liquidation, savings and loan institutions that failed.
B. RTC operated until 1996.
C. RTC was charged with acting as conservator and receiver during the resolution of the insolvent institutions.
D. RTC took over the functions of the Federal Disposition Association (FADA), making it the largest single seller of real estate.
E. On its dissolution, RTC’s duties were taken over by FDIC.
VIII. Appraiser Licensing
A. FIRREA created the requirement that as of July 1, 1991 (later extended to January 1, 1993), all “federally related real estate appraisals” be performed only by appraisers licensed or certified (as required) by the state in which the real estate is located.
B. A certified appraiser is required for transactions involving property valued at more than $1 million, or complex one-unit to four-unit residential property with a transaction value greater than $250,000.
C. Licensed status generally is required for appraisals of one-unit to four-unit residential property, unless the size and complexity of the property indicate that a certified appraiser is necessary.
D. Appraisals on nonresidential property and complex residential property valued at less than $250,000 also may be handled by licensed rather than certified appraisers.
E. The current minimum valuation threshold below which an appraiser licensing or certification is not required is $250,000.
F. However, Fannie Mae, Freddie Mac, HUD, and the VA still require the use of state-licensed or certified appraisers.
IX. The Appraisal Foundation
A. FIRREA requires that state appraiser licensing and certification qualifications and appraisal standards meet or exceed those of the Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB) of The Appraisal Foundation.
B. The ASB establishes the rules for developing an appraisal and reporting its results. Also is responsible for the enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP), which have been adopted by all major appraisal groups.
C. The AQB establishes the qualifications for states to follow in the licensing, certification, and recertification of appraisers.
X. Other Federal Legislation
A. Fair Housing – the federal fair housing laws cover real estate appraisals, as well as brokering and selling real estate
B. Appraisers also need to be familiar with environmental law, and how certain contaminations can affect the value of real property
C. Professional Standards of Practice – In 1985, nine appraisal groups formed an Ad Hoc Committee on USPAP
D. The original USPAP standards were published in 1987, and have been amended several times since.
E. USPAP Standards 1, 2, and 3 cover real property appraisal, real property appraisal reporting, and review appraisal.
XI. The Modern Appraisal Office
A. With the increasing availability and range of use of small, easily programmed office computers, the appraiser must be acquainted with a variety of appraisal-based computer applications.
B. The major appraisal software packages cover everything from case tracking, including data collection and report preparation, to management of the appraisal office, including billing and staffing.
C. High-speed Internet capability is almost a requirement in today’s business environment.
D. Computer-maintenance and off-site storage of files is also extremely vital.
E. A good laser printer capable of producing at least six black and white pages per minute at a resolution of at least 600 by 600 dpi. A color printer for the photograph pages is also a nice to have second printer.
F. Back-up power supply and a back-up storage system for the computer memory is essential.
G. Geographic Information Systems (GIS) – satellite-based mapping systems based on latitude and longitude are entering the commercial marketplace.
H. Electronic Data Exchange (EDI) – an electronic link between the lender and the appraiser via modem allows a computer in the appraiser’s office to transmit the required information almost instantaneously, and a hard copy of the report is no longer needed in some cases.
I. Camera – The digital camera is a must for the modern appraisal office. An appraiser can download photos of subject properties and comparables directly into the appraisal software program for storage and later retrieval.
J. Although the use of technology has greatly aided the appraiser, there will never be a substitute for the skilled and informed judgment of a professional appraiser.
PART TWO – THE APPRAISAL PROCESS
I. Steps in the Appraisal Process
A. An appraisal begins with a specific assignment. Every appraisal requires the organized collection and analysis of data. Specific data about the property, general date about the surrounding area, and data applicable to the appraisal approach being used.
B. The eight steps to the appraisal process are as follows:
1. State the problem. Defining the appraisal problem includes the following:
a.) Identification and location of the real estate
b.) Identification of the property rights to be appraised
c.) Definition of value to be estimated
d.) Purpose and intended use of the appraisal
e.) Effective date of the value estimate
f.) Any special limiting conditions
2. List the data needed and the sources.
3. Gather, record, and verify the necessary data.
4. Determine the highest and best use.
5. Estimate the land value
6. Estimate value by each of the three approaches.
7. Reconcile the estimated values for the final value estimate.
8. Report the final value estimate.
II. Beginning the Appraisal Process
A. Purpose and Use of the Appraisal – market value is the most frequently sought appraised value.
B. Interests to be Appraised – the form of legal interest being appraised must always be specified.
C. The estimated value of an interest depends on the term of the interest, any limitations on property use during that term, whether the term is transferable, and other factors.
D. Date of the Value Estimate – an appraisal may be made as of any date – past, present, or future. Most often, the current value is sought.
E. USPAP requires the effective date of the appraisal and the date of the report both be included
F. An appraiser can estimate value as of a past date or a future date. In order to avoid misleading a client, the appraiser should always state the assumptions under which the appraisal is made, and any limitations on the use of the appraisal.
III. Limiting Conditions
A. Fannie Mae and other agencies do not expect an appraisal to be all-encompassing.
B. A Statement of Limiting Conditions and Appraiser’s Certification help define the appraiser’s role and specify conditions under which the appraisal is made.
C. Fannie Mae does not allow additions or deletions to their appraisal form
D. For other transactions, the appraiser may draft a customized set of limiting conditions.
E. Under USPAP, the appraiser must ensure that each written or oral real property appraisal report must “clearly and accurately disclose any extraordinary assumption, hypothetical condition, or limiting condition that directly affects the appraisal and indicate its impact on value.”
IV. FHA Appraisals
A. Appraisers who do FHA work must now complete a three-page form describing, in detail, the physical condition of a home.
B. The new standards require that appraisers pinpoint “problems with plumbing, walls, ceilings, roofs, foundations, basements, electrical systems, and heating and air conditioning systems; soil contamination; the presence of wood destroying insects; hazards and nuisances near homes; lead-based paint hazards; and other health and safety problems.”
C. Appraisers will not be certified to do FHA appraisals until they pass the HUD-mandated exam.
V. Valuation Approaches
A. Sales Comparison Approach – the sales comparison or market data approach to appraising makes the most direct use of the principle of substitution. The appraiser finds three to five properties that have sold recently and are similar to the subject property. The appraiser notes any dissimilar features and makes an adjustment for each by using the following formula:
Sales Price of Comparable Property ± Adjustments = Indicated Value of Subject Property
All adjustments are made to the comparable properties. If the comparable is superior in a particular feature to the subject, the appraiser subtracts the value of the feature from the comparable. However, if the comparable is inferior in a particular feature to the subject, the appraiser adds the value of the feature to the comparable.
Example: House A, which sold for $55,000, is comparable to house B, the subject property, but has a garage valued at $5,000. House B has no garage. On this case, using the formula for the sales comparison approach, the market value of the subject property would be reached as shown below.