Frequently Asked Questions
What is an Appraisal?
The single, largest investment most people will ever make is to purchase a home. Whether it’s a primary residence, a second vacation home or an investment, the usual parties involved come easily to mind – the Realtor, mortgage company and the title company.
So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.
This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay – or a seller receive – for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.
The first step to an appraisal is the inspection, which is done to ascertain the true status of that property. The appraiser must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features – or defects – that would affect the value of the house.
After the inspection, an appraiser uses two or three approaches in determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
The cost approach is the simplest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? Mitigating factors, such as location and amenities, are usually not reflected in the cost approach.
Mitigating factors, such as the location and amentities, rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ”comparable” to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.
In the case of income producing properties – rental houses for example – the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
By combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ”bidding wars” that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money than the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.
When do I need an Appraisal?
Every year people buy, sell or refinance their own slice of the American Dream. Most, if not all, of these transactions include a simple line item for an appraisal. It has become an understood and accepted part of a real estate transaction. ”Let’s bring in the expert and make sure we’re not spending too much on this property.”
But is this the only reason to get an appraisal? Are there other times when the services of a certified, licensed, independent real estate professional might come in handy?
Property Tax Challenges
It’s a running joke that every one has a different perspective of what a house is worth. And it’s the tax assessor that seems to always come in at the high end of the scale! Challenging the tax assessment has become an annual ritual in many parts of the country. Unfortunately, most people go into these challenges unarmed. They may pull some information from the internet to support their claims, but have no real basis other than: ”It wasn’t worth that much last year.”
A real estate appraiser can help in these situations. While it may not be economical to commission a full appraisal to lop a few hundred off your tax bill, often an appraiser can do a limited appraisal or neighborhood analysis for much less. These documents can carry a lot of weight when you appear before an appeals board.
Private Mortgage Insurance or PMI is the supplemental insurance that many lenders ask home buyers to purchase when the amount being loaned is more than 80% of the value of the home. Very often, this additional payment is folded into the monthly mortgage payment and is quickly forgotten. This is unfortunate because PMI becomes unnecessary when the remaining balance of the loan – whether through market appreciation or principal paydown – dips below this 80% level. In fact, the United States Congress passed a law in 1998 (the Homeowners Protection Act of 1998) that requires lenders to remove the PMI payments when the loan-to-value ratio conditions have been met.
Many appraisers offer a specific service for home owners that believe they have met the 80% loan-to-value metric. For a nominal fee, the appraiser can provide you with a statement regarding the home value. Some will even take the next step and help you file a challenge with your mortgage company. The costs of these services are very often recovered in just a few months of not paying the PMI.
Before someone decides to sell a home, there are several decisions to be made. First and foremost: ”How much should it sell for?” But first there may be other equally important questions to ask: ”Would it be better to paint the entire house first?” ”Should I put in that third bathroom?” ”Should I complete my kitchen remodel?” Many things which we do to our houses have an effect on their value. Unfortunately, not all of them have an equal effect. While a kitchen remodel may improve the appeal of a home, it may not add nearly enough to the value to justify the expense.
Appraisers can step in and help make these decisions. Unlike a Realtor, an appraiser has no vested interest in what amount the house sells for. His fee is based on his efforts, not a percentage of the sales price. So seeking a professional appraisal can often help homeowners make the best decisions on investing in their homes and setting a fair sales price.
Estate Planning, Liquidation or Divorce
The loss of a loved one is a difficult time in life. Likewise, a divorce can be a particularly traumatic experience. Sadly, these events are often complicated by difficult decisions regarding the disposition of an estate. Unlike many wealthy individuals, the majority of Americans do not have dedicated estate planners or executors to handle these issues. Also, in most cases, a home or other real property makes up a disproportionate share of the total estate value.
Here too, an appraiser can help. Often the first step in fairly disposing of an estate is to understand its true value. Where property is involved, the appraiser can help determine the true value. At this point, equitable arrangements can more easily be arrived at among disputing parties. Everyone walks away knowing they’ve received a fair deal.
There are other uses for real estate appraisals. The highly-trained individuals behind these services are always looking for ways to put their expertise to work for home owners and the people who support them.
Do You Handle Foreclosures?
Thompson Appraisal Services is experienced when it comes to bank owned properties in Horry & Georgetown Counties.
Homes in foreclosure and houses that have gone back to the financial institution’s possession present particular appraisal challenges.
For a home in foreclosure, you might need to understand the difference between the fair market price and “quick disposition” to know your potential charge-off liability. We can provide both snapshots of fair market value for our mortgage lending clients, as well as “quick sale” forecasts that respect your time line.
The professionals at Thompson Appraisal Services have the experience to deal with the unique dynamics of a foreclosure appraisal. Contact Thompson Appraisal Services for a company you can count on.
Owners of houses in foreclosure, of course, can present specific challenges. They might be opposed to allowing an inspection of the house. Often the properties have been ransacked, often at the hands of the former residents. Or, it’s likely you’ll find a house at a minimum abandoned or the home languishing in disrepair for extended periods of time.
If your house has already returned to bank owned, you will be interested in an expeditious disposition. However, you might want to know about and review three values: as-is, as repaired, and “quick sale.” These symbolize the worth of the property without any repairs performed, with the repairs needed to make the home marketable at full market value comparable with the other real estate in the area, and, somewhere in the middle, with minor investment in repairs – selling the property quickly, possibly as a “fixer-upper”. Again, we understand your time line and the special situation of a Real Estate Owned home, in addition to the unique data you’ll need — competing listings, market trends, and so forth. You can count on Thompson Appraisal Services to handle the appraisal of your bank owned property professionally and efficiently. Contact us today.