Why Do I Need an Appraisal?

Section 10: Why Do I Need an Appraisal?

You can be assured your Appraisal will be an exhaustive study in valuation of your most cherished asset…your home.

A. Role of an Appraiser/Your Appraisal

An Appraiser is a state-licensed professional who can establish the approximate value of your property based on an analysis of recent market data gathered in your market area. All Appraisals we order on your behalf are in compliance with the Home Valuation Code of Conduct.  Your home is carefully inspected and measured, and detailed information is recorded about the property such as:

  •   Gross living area
  •   Age of the structure
  •   Condition of the structure
  •   Quality of Construction
  •   Neighborhood factors affecting value or marketability

Exterior photographs of your property are taken at the time of inspection and are attached to the report along with a map of the area. Similar information taken from public records and other reliable data sources is gathered on three or more recent sales of similar properties in your market area. Your property is then compared with the comparable properties and adjusted by the appraiser for market-perceived differences. The result of this process is typically recorded on the Uniform Appraisal Report.

The fee for an appraisal is paid on the day of the inspection by the borrower. If the property is a duplex, the fee will be somewhat higher, as the work to complete an appraisal of this property type is more complex.

FHA mortgage loans are government-backed loans, which have additional requirements. In addition to providing an estimate of value, the FHA-approved appraiser observes the property for any visible deficiencies that may affect the livability of the property or the health and safety of the property's occupants. Items such as peeling lead-based paint, three or more steps without a railing, several layers of roof shingles, rusty water heaters, and leaking pipes are some of the concerns for the appraiser. The fee for an FHA appraisal is typically somewhat higher than for a conventional appraisal.

B. Appraisal Basics

An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights to be appraised. The appraiser does not create value; the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the amenities, site characteristics, location, and other market influences as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning of the task. Significant research and collection of data must be completed prior to the appraiser arriving at a final opinion of value.

Using three common approaches, which are all derived from the market, the appraiser arrives at an opinion or estimate of value.

  • The first method is the SALES COMPARISON APPROACH, which uses other "bench mark" properties (comparables) of similar size, quality and location that have recently sold to determine value. This is by far the most commonly used approach in residential appraising today.
  • The second approach to value is the COST APPROACH. This method's approach derives value by determining what it would cost to replace the existing improvements as of the date of the appraisal, less any physical deterioration, functional obsolescence and economic obsolescence.
  • The INCOME APPROACH is used in the appraisal of incoming-producing rental properties and has little use in the valuation of owner-occupied, single family dwellings. This approach provides an objective estimate of what a prudent investor would pay based on the net income the property produces.

For many years, regulations require that residential appraisers be a "neutral third party" and therefore, the appraiser may not be an employee of the lending institution or mortgage broker; rather, appraisers are either employees of Appraisal Management Companies or self-employed independent contractors. Since the appraisal process is required for almost every loan transaction, and oftentimes plays an extremely critical role in the overall analysis and final outcome of the loan request, appraisal activities are monitored by the Appraisal Management Companies and State Appraisal Commissions.

The appraiser will want to know the purpose of the appraisal, requested date of completion, and if the property is listed for sale. If the property is listed, the appraiser will need to know pertinent listing information. It is helpful to your appraiser for you to have readily available documentation pertaining to the property, if certain items do not appear on public record, such as deeds, surveys, fully executed purchase agreements, copies of utility and tax bills. The appraiser will also need to know what personal property, such as appliances, are included in a Purchase Contract if you are buying or selling a property.

If your property is income producing, income and expense statements for the past two years and a copy of the leases with your tenants may be required by the lender.

Serving the Great Mid-South Region
Offices: 901-388-1588 or 901-476-9100 | Toll-Free: 
888-580-1588 | Fax: 901-388-6202 | Email: info@1stophomeloans.com
1 STOP MORTGAGE | NMLS#215671 | TN Lic#108931 | 5909 Shelby Oaks Dr, Suite 129, Memphis, Tennessee 38134