Wednesday, December 26, 2007

What Do You Mean - "Appraisal"?

What do you mean – Appraisal?

According to Wikipedia, a Real Estate Appraisal is defined as follows:

Real estate appraisal is the practice of developing an opinion of the value of real property, usually its Market Value. (Real estate appraisal is American usage; many other countries use the terms property valuation or land valuation.) The need for appraisals arises from the heterogenous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location - which is the most important determinant of their value. So there cannot exist a centralised Walrasian auction setting for the trading of property assets, as there exists for trade in corporate stock. The absence of a market-based pricing mechanism determines the need for an expert appraisal/valuation of real estate/property.

A real estate appraisal is performed by a licensed or certified appraiser (in many countries known as a property valuer or land valuer). If the appraiser's opinion is based on Market Value, then it must also be based on the Highest and Best Use of the real property. For mortgage valuations of improved residential property in the US, the appraisal is most often reported on a standardized form, such as the Uniform Residential Appraisal Report.[1] Appraisals of more complex property (e.g. -- income producing, raw land) are usually reported in a narrative appraisal report.

So how does this affect you, as either a buyer or a seller?

Whenever there is a mortgage involved in the sale of real estate, an appraisal is required. The appraisal gives the mortgage lender an assurance that the real estate is worth what the buyer is paying. In the (unfortunate and unlikely) event that the buyer cannot meet their mortgage obligation, the lender will rely on the appraised value such that the lender will not actually lose money. The lender will sell the property for the amount they are owed (knowing that it is worth at least as much as they are owed, based on the appraised value), and then turn around and lend the money to the next buyer.

As a buyer, the appraisal (usually ordered by your lender) gives you an assurance that you are not over-paying for the property you are buying. Generally, though, your Realtor will have already provided you with a CMA (comparative market analysis) so that you know approximately how much the property is worth. So, is your Realtor’s CMA as good as an appraisal? Generally, again, no. A true appraisal can only be done by a licensed appraiser. Some Realtors also hold an appraiser’s license, but they are few and far between. So, the CMA done by your Realtor, and the appraisal done by your lender, should be similar in value, but not exactly equal.

As a seller, the appraisal (ordered by the buyer’s lender) gives you an assurance that you aren’t “giving” away your property. Note, however, that the lender is the client of the appraiser (in other words, the lender ordered the appraisal, so the lender gets to know of, and keep, the appraisal information to themselves). As the seller, you may not get to see the appraisal report. As in the paragraph above, though, your Realtor will have provided you with a CMA prior to your listing agreement, so you should have a very good idea of what the appraisal report should say.

Sadly, though, there are some unscrupulous appraisers, lenders, and Realtors in every marketplace. What they do is practice mortgage fraud.

For example, an unscrupulous appraiser could falsify their appraisal by coming up with a value significantly higher than actually exists. Then the lender, thinking that the property is worth the appraised value, will over-lend against the property. The extra money ends up with the buyer, who takes off with the money and leaves the property to deteriorate. Fortunately, such unscrupulous appraisers are very rare, but they do exist.

I’d be happy to answer your questions about appraisals, or provide references for outstanding local appraisers. Just ask!

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