JP Morgan & Company, Real Estate Appraisers and Consultants • Are real estate appraisals really necessary? • What qualifies someone to be a real estate appraiser? • What is the difference between a short form report and the more traditional "Fannie Mae" (URAR) Uniform Residential Appraisal Report and other "lender" orientated reports? • What Services do appraisers provide? • Can I get a copy of an appraisal a lender ordered on my home? • Is there anything I can do to speed up the process? • What constitutes a typical appraisal? • What is the market approach? • What is a comparable sale? • What is an arms length transaction? • What is Market Value? • What is the Cost Approach? • What is the income approach? • What does highest & best use mean? The Importance Of A Professional Real Estate Appraisal Because much private, corporate, and public wealth lies in real estate, an accurate estimation of a property's value is essential to the economic well-being of the individual client, as well as society as a whole. A professional real estate appraiser assists his / her clients in estimating the market values of properties through by gathering, analyzing, and interpreting of information relevant to a property so as to arrive at the most accurate value conclusion possible. Unquestionably, the professional opinion of the appraiser, backed by extensive training and knowledge, influences the decisions of people who own, manage, sell, purchase, invest in, and lend money on the security of real estate. And because the appraiser is trained to be an impartial third party in the lending process, this professional serves as a vital "check in the system," protecting real estate buyers from overpaying for property as well as lenders from over lending to buyers. BACK TO TOP Appraiser Qualifications Amazing as it may seem, anyone can legally call themselves a "real estate appraiser" WITHOUT ANY EDUCATION OR EXPERIENCE. Federal regulations require, however, that all appraisals accomplished for "federally related transactions" be performed by STATE LICENSED OR CERTIFIED APPRAISERS. In New England, all 6 states have specific licensing requirements, with each state having somewhat similar licensing regulations to the others. These requirements typically mandate that all real estate appraisers be, at a minimum, state licensed or state certified and have fulfilled rigorous education and experience requirements. Each LICENSED or CERTIFIED APPRAISER and must adhere to strict industry standards and a professional code of ethics, promulgated by the Appraisal Foundation and identified as the Uniform Standards for Professional Appraisal Practice (USPAP). To protect your own interests, always hire an appraiser properly LICENSED or CERTIFIED by the state in which the property to be appraised is located. BACK TO TOP Short form "2055" Vs. "URAR Fannie Mae" Form Appraisal Report A "Fannie Mae" - URAR form report has many items required by the secondary mortgage lending market, that are not neccesarily needed in a simple report to find the market value. Both primarily rely on a direct sales comparison or market approach with a comparison grid (see below) to determine the market value of the subject property. The lenders report has many additional arbitrary requirements which have little bearing on the value found by a report needed for many other purposes. The traditional "lender" reports need census tract & smsa information for tracking lending patterns. Some lender reports require a lot of the appraisers effort to determine and substantiate how much additional rental income is available to support a higher mortgage. In addition, a great deal of detail is required to help the lender determine what if any, necessary repairs might be needed before the property meets their underwriting requirements. All of these things and much more, may be quite important for a lender, but probably are useless for most people, who just want to know what a property is worth for a variety of reasons. Our short form reports are particularly well suited for helping a seller to price a home for sale, helping a buyer to decide how much to offer or pay for a home, for estate tax, gift tax, tax grievance, uncontested divorce & most any other potential use other than for obtaining a mortgage or in litigation where the report will be used in conjunction with expert testimony. BACK TO TOP Services provided In our complex society, you may need and use the services of a professional real estate appraiser for a variety of reasons. Depending upon an appraiser's designation and qualifications, he or she can provide some or all of these services: Appraisals - Residential or Commercial; Counseling and Consulting; Evaluations; Expert Witness Testimony; Litigation Preparation; Feasibility Studies; Market Analysis; Market Rent & Trend Studies; Tax Assessment Review and Advice or Zoning Testimony. BACK TO TOP Know Your rights in the appraisal process! Under the Equal Credit Opportunity Act, your lender must provide you with a copy of the appraisal report upon your written request. If you are dissatisfied with any information contained in your appraisal report, you should contact your lender immediately. BACK TO TOP The following Items, if available, will help your appraiser to provide a more accurate appraisal in a shorter period of time. A survey of the house and property; A deed or title report showing the legal description; a recent tax bill; a list of personal property to be sold with the house if applicable; a copy of the original plans & specifications, The date and purchase price you paid when you purchased the property; a list of recentimprovements & cost as well as any other information you feel may be pertinent. BACK TO TOP The Appraisal Process The appraisal process is an orderly and concise method of reaching an estimate of value. The process has six major steps which include: definition of the problem, preliminary survey and appraisal plan, data collection and analysis, application of the three approaches to value, reconciliations of valueindications, final estimate of defined value. This process assists the appraiser in reaching a sound conclusion. The major phase of this process involves the application of the three approaches to value which include the Market Data Approach, the Cost Approach and Income Approach. The three approaches are reconciled and the value via most applicable approach, in the opinion of the appraiser, is selected as the final estimate of value. In most residential appraisals, particulary those of single or two family dwellings, the direct sales comparison or market approach best reflects the actions of buyers and sellers and is the most convincing and defendable approach to value. BACK TO TOP The market or direct sales comparison approach to value The market or direct sales comparison approach to an estimate of value is a process of comparing market data, that is, prices paid for similar properties, prices asked by owners, and offers made by prospective purchasers or tenants willing to buy or lease. Typically a comparison grid is used and adjustments are made to each of the comparable sales used for major differences between the comparable and the subject property for such items as location, gross living or building area, lot size, condition/effective age, market conditions, degree of remodeling, construction quality and significant amenities, ie: fireplace, jacuzzi, in ground pool, garage, deck, patio, porch and central air conditioning etc. In the market approach, the appraiser attempts to both gauge and reflect the anticipated reaction by a typical purchaser to the subject property. BACK TO TOP Comparable sales A comparable sale is a property, that is similar to the subject property in most respects, is located in a similar (nearby) location, and has sold recently at arms length. The selection of comparable sales is in most residential appraisals, the single most important determining factor in establishing value. It is the appraisers responsibility to adequately research the local real estate market and determine which comparable sales best represent the value characteristics of the subject property. BACK TO TOP Arms length transaction An arms length transaction is one in which both seller and purchaser act completely independently of each other and have no connection or relationship to each other. BACK TO TOP Market value Market value or fair market value is the most probable price that a property should bring (will sell for) in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised; (3) a reasonable time is allowed for exposure to the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. BACK TO TOP The cost approach to value The cost approach combines an estimate of land value with an estimate of depreciated reproduction or replacement cost of the improvements. The principle of substitution is the basis of the cost approach, in that no rational person will pay more for a property than the amount for which he can obtain, by purchase of a site and construction of a building, with undue delay, a property of equal desirability and utility. BACK TO TOP The income approach to value The income approach is based on an estimate of net income from the operation of an income producing property and the selection of the property capitalization rate from market indications of similar properties. The principle of anticipation is the basis of the income approach and affirms that value is created by the expectation of benefits to be derived from possession, operation and/or capital gain at resale. BACK TO TOP Highest & best use Typically, highest & best use means the use or utilization that provides the most profitable return on investment. It is that use, selected from reasonably probable and legal alternative uses, which are found to be physically possible, appropriately supported and financially feasible to result in the highest possible land value. BACK TO TOP