Listed below is the step by step process an appraiser performs to complete a real estate appraisal.
1. Contact the property owner prior to the inspection
When an appraiser contacts the owner of the property to be appraised (subject property) to schedule an appointment it is a good idea for the appraiser to thoroughly interview the owner about the property. This can help the appraiser determine some of the parameters they should use to research the comparable sales, pending sales, expired listings and active listings in the subject's market area.
2. Research comparable properties
After the appraiser has interviewed the owner or someone with knowledge of the subject property they will need to research the subject's market area to find comparables. Most appraisers use at least two sources to do research, the Multiple Listing Service (MLS) and public records from the county's property appraiser's office. There are four types of comparables the appraiser will analyze, sales, pending sales, expired listings and active listings. Listed below are the reasons for each type of comparable.
Sales: For the appraisal report you will need at least 3 comparable sales. Sales give a good indication of what typical buyers will pay for a comparable property in the subject's market area. The appraiser will try to find comparable sales that occurred in the past 3 months, however they may need to search back further depending on the activity of comparable sales in the area. They can also search nearby competing neighborhoods that would be considered by the same buyer.
Pending Sales: The appraiser should try to include at least one comparable pending sale in the report as they are good indicators of the current market conditions. If the comparable sales that were used in the report all closed a few months or more prior to the time of the appraisal a pending sale is good to have to show if the market is increasing, decreasing or stable.
Active Listings: Listings will tell the appraiser the asking price of competing properties in the area. Listings will also help determine market conditions. If the current listings are all priced lower than the comparable sales used in the report this is an indication of a declining market. The principle of substitution is also used to help the appraiser determine what the property is not worth. If there are comparable homes listed for sale for $200,000 we know the subject is probably not worth more than $200,000.
Expired Listings: The principle of substitution is also used for expired listings. If the comparable property was listed for sale for a reasonable length of time and was unable to sell this will also tell the appraiser what the subject is not worth. If comparable homes in the subject's market area did not sell for $150,000 than we know the subject property is probably not worth more than $150,000.
By analyzing the four different types of comparables the appraiser can narrow down the subject's value and decide which comparables to consider when they are in the field.
3. Inspect the subject property
Inspecting the subject property can take from 15 minutes to an hour +/- depending on the size of the property. The appraiser will measure the exterior of homes and townhomes when possible, condos obviously are measured in the interior. The square footage of garages, porches, storage, etc. will be removed from the total square footage of the dwelling to determine the gross living area.
Also, at the time of inspection the appraiser will takes notes about the property which includes the design, exterior wall construction, roof surface material, window type, amenities (pool, porch, patio, etc.), floor and wall materials, appliances, total number of rooms, bedrooms and bathrooms and the condition of all features. Also noted will be any needed repairs and the estimated cost to fix any problems.
4. Choose comparables
After inspecting the subject property the appraiser will analyze the comparable printouts that they brought with them to the inspection. The appraiser will read through the information for each comparable to determine which would be the most similar.
5. Drive by comparables and take notes
After the appraiser has chosen 6 to 8 sales and a few pending sales (if available) and active listings they will make a list of these properties. The appraiser will then drive by each of the comparables to view the exterior and take a photo and notes, such as condition, view, construction, amenities, etc. Some appraisers also will knock on the door of the comparables to verify information.
6. Market stats for the market area
Once back at their office the appraiser will analyze the neighborhood (market area). This will include housing trends to determine if property values are increasing, stable or declining. Demand and supply, shortage, in balance or over supply. Marketing time, under 3 months, 3 - 6 months or over 6 months. These stats will help the appraiser determine if they need to adjust the comparables in the grid for property values increasing, decreasing or making no adjustment if values are stable.
7. Input data into the appraisal report
The appraisal report will consist of information obtained when the appraiser inspected the subject property, data from public records, multiple listing service (MLS) and information verified through other sources, such as real estate agents, buyers, sellers, etc.
8. Sales Comparison Approach
The most common and accurate approach to appraising a residential property is the sales comparison approach. This approach compares the various features of the comparables to the subject and adjusts the comparables for the differences. The adjustments are typically determined by market data the appraiser has researched and analyzed. Listed here are some of the areas that are typically adjusted for in the grid, location, view, site size, condition, gross living area, number of bedrooms and bathrooms, car storage, amenities such as a pool or porch. Anything that has value in the market can be adjusted for in the grid, with the exception of personal property. The appraiser will estimate a value in the sales comparison approach based on the adjusted sales prices of the comparables. Typically most weight will be given to the most similar comparables, however many appraisers select the average of all comparable sales for their estimate of value.
9. Verify comparables information
When the appraiser is completing the sales comparison approach they will analyze the data from public records and multiple listing service and attempt to verify the details of the comparables transactions through a party to the transaction, typically the listing or selling real estate agent or the buyer or seller. Attempting to verify this data is tough as most people will not return an appraiser's call and each party has a different opinion on the property's condition and many times don't recall details of the deal, including concessions. Most of the time the appraiser will need to use the data that is available to them, public records and MLS.
10. Income Approach
The income approach is typically used for 2-4 family properties as single family homes in most areas are owner occupied. The appraiser will research the market similar to the sales comparison approach to find comparable rental properties that have recently sold. The rent will then be divided into the sales price to determine a Gross Rent Multiplier (GRM). Then the subject's estimated monthly market rent will be multiplied by the Gross Rent Multiplier to determine an estimated value market value based on the income approach.
11. Cost Approach
Most lenders require the appraiser to provide the cost approach even if it is not applicable, there is no need for a cost approach on a 90 year old home. Determining depreciation is difficult, therefore the cost approach should only be used for new and newer homes. The appraiser will typically use the residential cost handbook provided by Marshall and Swift. The cost approach will include the estimated cost per square foot for the property for the gross living area, car storage, porches and patios. Amenities such as a pool will be estimated. The "As Is" value of site improvements are also included. If there are vacant land sales in the area the appraiser will include them in the cost approach section. If there are no vacant land sales the appraiser will estimate the site value by extracting it through the cost approach.
12. Reconcile Value
At the end of the report the appraiser will analyze the value that was determined through all three approaches to value, sales comparision, cost and income and determine which should be relied upon, typically the sales comparison approach for residential appraisals. This value will be indicated for a particular date.
That is a quick overview of the real estate appraisal process. I hope you found it informative.
