You are aware, of course, of the crisis in the real estate market. You may be thinking that you ought to become a foreclosure real estate investor. There are many bargains to be had but it is important that you know how to evaluate a property before you make an offer to buy it. The following should serve as a starter’s guide to understanding real estate appraisals.
If you are going to obtain a mortgage on the property, the lender will require that you employ a recognized appraiser. They may have a list of appraisers from which you must choose. Who determines that an appraiser is qualified? Generally speaking, there are two major organizations in the field. They are The Appraisal Institute and The National Society of Real Estate Appraisers. Both require that their membership maintain the highest level of professional conduct in the areas of ethics, enforcement procedures, grievances and continuing education.
A typical appraisal is in written form. The form that is usually used is called the Uniform Residential Appraisal Report. This form is acceptable to most lenders as well as most secondary market mortgage buyers. In it are sections covering the actual site, of course, as well as commentary on the status of the neighborhood. The overall condition of the property, both inside and outside is referenced, noting improvements, the equipment that is included and a variety of other pertinent items. The appraisal is normally accompanied by a battery of photos, including aerial, taken of the property in general and any specific details that may be important.
In trying to reach a conclusion as to the proper price for the property, the appraiser will use three separate methods. Frequently, all three are presented to the interested parties, usually with a summary number.
The cost method assumes that the property will need to be totally rebuilt. The land value is constant and the replacement cost of the structure and its contents are assessed, taking into account depreciation.
The income method determines the rental rate of the property. From this, a discounted future value is calculated.
The most common method is the price method. Here the appraiser studies the prices that similar properties have recently sold for in the same neighborhood.
It is important to understand that an appraisal is an estimate. Obvious defects, for example, are noted but the appraiser does not do a complete engineering study to determine the precise condition of every facet of the property. The appraiser does not guarantee that the price estimate is accurate or that the condition is correctly portrayed. In addition, appraisers do tend to favor the guidelines of the lender, since the lender, not the borrower, is the one that sends them future business.
Don’t be afraid to question the appraisal if you don’t think its right. You may even retain a second appraiser if you feel the difference is significant. A typical home appraisal runs around $200-$400 but is cheap compared to making a mistake on a major purchase.