View our tutorial video.
View a sample appraisal
A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.
Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
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.
Appraiser Licensing
To go in depth about the licensing of appraisers you must first understand what an appraisal really is. In its most simple form an appraisal is an "opinion of value". Now obviously anyone could give you an opinion on what a piece of real estate is worth, Realtors, investors and your neighbors do it all the time. These opinions are not, however, appraisals because only a licensed appraiser may perform an appraisal. For that exact reason appraisers are required to complete a substantial amount of education, pass strenuous state exams and complete a minimum of 2,000 hours of training as an apprentice before they are granted a license by the state of Texas. Much like other professions, including doctors and attorneys, appraisers are also held to a much higher standard and must adhere to a set of regulations and guidelines. These regulations are set forth in the "Uniformed Standards of Professional Appraisal Practice", or USPAP for short. What all of this means is that appraisers are not just guys with a tape measurer spitting out unsubstantiated values, there actually is a method to the madness.
Through training, experience and continued education appraisers learn the art and techniques of real estate appraisal. No other profession is licensed to perform appraisals and this is why when you enter into a financial transaction to purchase or sale a home, only a licensed real estate appraiser may perform the appraisal. Furthermore, appraisers are called upon to complete these assignments because we have no vested interest in the transaction, keeping us completely unbiased. Whereas Realtors, for example, are commission based and benefit from a higher selling price, appraisers charge a flat fee for their service and are not affected by the overall value of the property.
Each state maintains its own licensing authority which oversees the licensing of appraisers. In Texas this authority is the "Texas Appraiser Licensing and Commission Board", or TALCB for short. All registered appraisers that are able to perform appraisals for federally-related transactions are also listed in the Appraisal Subcommittee, or ASC, national registry.
What makes up an Appraisal
This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receives - 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 Site Visit (Inspection)
So what goes into a real estate appraisal? It all starts with the site visit of the property. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she 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 contributory features, defects or a functional obsolesce's that would affect the value of the house.
Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
Cost Approach
The cost approach is the easiest 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? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
Sales Comparison
Instead, appraisers 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.
Reconciliation
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.
