Ever wonder how appraisers come up with the reconciled opinion of value for the residential appraisal? This article will provide some insight to the layperson on how this occurs. We must first identify the problem to be solved (a type of value sought such as market value, insurable value, and more), the market value being the most common. We must also determine what we need to do to solve the problem (scope of work). Once we do this, then we proceed.
First, not All Appraisers Appraise the Same
This can be related to a few things such as appraiser knowledge, appraiser experience, appraiser not being technologically savvy, appraisers not willing to change, and other reasons. For these reasons and others, you will never get 5 appraisers to come up with the same opinion of value (appraisal). We should, however, be in the “ballpark”. So here we go.
Subject Data on Residential Appraisal
Let’s start with the subject that is the house being appraised. We visit the home, measure to obtain square footage and sketch, take photos (front, rear, and street) at a minimum. These days we require to take interior photos as well. We visually inspect inside and out looking at upkeep, quality, room additions, upgrades, and many other factors. We look at the subject neighborhood and any positive and/or negative aspects such as power lines, train tracks airplane flight paths, overall neighborhood appeal, and more. Please note, that when we use the term “inspect”, it is referring to visualization.
Sales Comparable Approach
After gathering all the necessary information and data for the subject. The appraiser turns his attention to finding appropriate comparables. Comparables are homes that have recently sold within the subdivision of the subject or close to the subject generally not more than 1 mile away. Comparables can also be listings, houses that are on the market for sale but have not yet sold. These comparables or comps as they are affectionately referred to need to be similar to the subject in terms of square footage, design, and amenities.
Any differences in any of these items require what we call adjustments to the comps. The adjustments can be based on quality or quantity (qualitative or quantitative), they can be a percentage or a dollar amount. The adjustments give the comps an adjusted sales price which is what we base the opinion of value. Some of us appraisers not all, also employ the use of charts and graphs to support our adjustments.
Cost Approach to Residential Appraisal
The appraiser also has to consider land value, depreciation, and cost of improvements. This is what next should be important to think about. It’s only accurate when we are appraising new home construction.
Income is only considered when the house is a rental property and provides income. In this approach, income and operating expenses, gross rent multipliers are count. There is much more that goes with the two latter approaches to value. However, we will continue with the main approach to value for the residential homes which is the Sales Comparable Approach. After adjustments are ready for the sales comparables, we form an opinion of value, review, and submit our report.
It is important as appraisers before we submit any report. This is what we as appraisers have to consider in all of our reports. Make sure we are adhering to the standards in all approaches to an opinion of value that we may use.
This article provides a brief overview of the consumer on how appraisers provide an opinion of value. There is, however, so much more to analyzing the data gathered and preparing an accurate and credible appraisal report.