How is an appraisal performed? Most people have a good idea of what an appraisal is, but let’s look at the definition of appraisal from the Uniform Standards of Professional Appraisal Practice, or USPAP as it is commonly referred (2018-19 Edition, published by The Appraisal Foundation).
APPRAISAL: (noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services. Comment: An appraisal must be numerically expressed as a specific amount, a range of numbers, or as a relationship (e.g., not more than, not less than) to a previous value opinion or numerical benchmark (e.g., assessed value, collateral value).
So now we are assured that an appraisal is about developing an opinion of value. Most people don’t know that the value to be developed must be defined. There are many kinds and definitions of value, but for the purposes of this publication, the focus will be on market value. This is the value commonly sought by lending institutions (banks, credit unions, etc.) in order to determine the level of funds available for a mortgage loan transaction on a residential property. Most lenders require an appraisal in order to determine the amount of funds that can be advanced, either in a purchase or refinance deal. The following steps (used in our office) briefly outline the process involved to provide a credible appraisal.
Step 1
–
Identify the property to be appraised. This is a preliminary discussion between the client and the appraiser that includes purpose and intended use of the appraisal, as well as the property address, the owner’s name, and a brief or detailed description of the property (might include a legal description).
Step 2
–
Research the legal and physical characteristics of the property to be appraised through public records. This begins by researching the property online or in the offices
of the assessor or equalization officer, auditor, recorder, and treasurer in the county where the property is located. Online records have helped significantly as an appraiser can typically obtain a property record card, a plat map, zoning information, taxes and assessed values, flood hazard information, wetlands data, dimensions, area, and a sketch of buildings with their age or year built.
Step 3
–
Perform a visit to the property. During this visit the appraiser will take detailed notes and photos in order to record information about the property that is more detailed than that available in the public records. This usually begins with a description of the exterior with the type of construction, siding type, roof covering, gutter type, window type(s), water & sewer services, exterior doors, porches, and type of foundation. On the interior the appraiser will tour the dwelling noting the walls, ceilings, and floor coverings, type of heating and cooling, kitchen cabinets, counters, interior doors, lighting, rooms and room count especially noting bathrooms, bedrooms, type of woodwork/trim, vaulted or cathedral ceilings, skylights, automated & custom features, closets, etc. After the interior is observed, the appraiser will want to also walk through any outbuildings on the property. Also, if there are any notable physical characteristics about the property that are not readily visible, the appraiser will ask the owner or occupant. This could include a pond or ponds that are not visible from the dwelling or other notable characteristics such as woods, creeks, etc. The type of dwelling will typically determine the amount of time that an appraiser will need to take adequate notes and photos during the property visit.
Step 4
–
The appraiser will typically drive around the subject neighborhood noting surrounding property types and their uses. After driving the neighborhood and taking notes, the appraiser will return to their office
Step 5
-
All notes taken during the property visit will be reviewed and compared to the data collected from public records. Any discrepancies will be reconciled through a detailed review of the notes and photos taken during the site visit. On some occasions the property owner or occupant will be called again to verify information that might be difficult to discern through field notes or
photos.
Step 6
–
After assembling and reconciling the property information, the appraiser will typically determine the highest and best use of the property as vacant and as improved. For most properties this is a simple task that is determined by the zoning of the property, its location, its physical characteristics, and surrounding properties. However, some are more difficult and require greater analysis to make an accurate determination. One basic “acid test” is this, “Is the property more valuable as vacant land or as improved?” This can be answered by determining the underlying land value compared to the value as improved (with the current dwelling in place). Another simple test is this, “Are surrounding properties similar in design and use or are they significantly
different?” basements, and other items. The most recent sales that are similar in location and physical characteristics will typically be used in the comparative analysis. An appraiser will use a minimum of three sales, but typically six or more sales are included if available. Adjustments are applied to the sales (if necessary) based on market derived data to quantify adjustments. The sales are adjusted to the subject, meaning a sale with a superior characteristic is adjusted downward to be similar to the subject property, while a sale with an inferior characteristic is adjusted upward . After all of the sales have been adjusted, a value range is produced. The appraiser then reconciles a value by determining which sale or sales are most similar to the subject property (property being appraised).
Step 8
–
A cost approach to value is developed. The value of the underlying land must be determined as the first step in the cost approach. The land value is typically determined at the beginning of the highest and best use analysis , so this portion should be done. Land valuation can be accomplished by several different techniques. Sales comparison analysis, graphic analysis, and a ranking analysis are three techniques that are commonly used to determine the land value. Cost estimates are developed next for the improvements. We rely on the Marshall and Swift Residential Cost Handbook as a source for replacement cost estimates of the (residential) improvements. After the replacement cost has been estimated, depreciation is charged as applicable. Depreciation takes three general forms - these which are physical, functional, and external. After the appropriate levels of depreciation have been determined, it is deducted from the cost new of the improvements. The depreciated cost of the improvements (cost new less depreciation) is added to the land value and site improvements (well, septic, drives, landscaping, etc.) to provide an opinion of value by the cost approach.
Step 9
–
When applicable, an income approach should be developed. In developing an income approach an appraiser researches the market for sales of similar properties that were rented at the time of sale. The sale price is divided by the monthly rent to produce a gross rent multiplier (GRM). The appraiser’s research will aid in determining market rent for the property being appraised and an appropriate gross rent multiplier will be estimated from the data available. The estimated market rent for the subject is multiplied by the gross monthly market rent of the subject to produce an estimated value by the income approach.
Step 10
–
After all applicable approaches to value have been developed, a value opinion is reconciled based on which approach is most credible as of the effective date
of the appraisal. This is selected by the appraiser, but is most commonly the sales comparison approach when adequate comparable sales are available
NOTE: This is just a brief summary of the steps used in our appraisal office. It is not intended to represent any other appraiser or firm’s opinions or analytical processes.