Lets start at the beginning!               

What is an appraisal and why do we need one?

A home is probably the largest single investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties in order to make it successful.

Most of the people involved are very familiar. The Realtor being the most common face of these types of transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.

It is the appraiser who makes sure the value of the property is equal to (in some cases more/less) the purchase price of the property. There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.

This is where the appraisal comes in. The definition of an appraisal follows:

A real estate appraisal is a service performed, by an appraiser, that develops an opinion of value based upon the highest and best use of real property. The highest and best use is that use which produces the highest possible value for the property. This use must be legal, profitable and probable. Also of importance is the definition of the type of value being developed and this must be included in the appraisal, ( ie: fair market value, condemnation value, quick sale value, etc.)


Below is a brief synopsis of the process an appraiser uses to determine value:


Identify client and intended users

Identify the intended use

Identify the type and definition of value

Identify the characteristics of the property (including location and property rights to be valued)

Effective date of the value opinion

Assignment Conditions

Extraordinary assumptions

Hypothetical conditions


This may vary from assignment to assignment based on the problem being resolved.


Market Area Data

General characteristics of region, city, and neighborhood

Subject Property Data

Specific characteristics of land and improvements

Comparable Property Data (Sales, listings)


Market Analysis

Demand studies

Supply studies

Marketability studies

Highest and Best Use Analysis

Site as though vacant

Ideal improvement

Property as improved


The process of valuing the site as it would stand alone.



Sales comparison

Income capitalization



The Inspection Process

So, what goes into a real estate appraisal? (This is part of step 3 above) The process starts with the inspection of the property being valued. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually view features, such as room layouts (flow of a property's interior), the number of bedrooms, bathrooms, property amenities such a fireplaces, heating and air conditioning systems, any modernizations, garages and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features or defects that would affect the value of the property. The exterior and underneath of the property are viewed for obvious flaws or defects in construction. Should defects or repairs be found during the inspection the appraiser may give a "cost to cure" these items if they are minor in nature or they may recommend a more complete "home inspection" by a professional home inspector. It is important to note that appraisers are not "home inspectors". An appraiser seeks obvious flaws and if possible, determines their cause. This is not always possible within the limits of an appraisers knowledge. This is when it becomes important to recommend a home inspector be contacted to complete a far more thorough inspection.

Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach. These are more thoroughly defined below.

The Approaches to Value:

Cost Approach

The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. In the past this value often set the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach. As a result this approach has been eliminated as a "required" approach. It is now used for insurance estimating but, most appraisers feel the insurance companies should use their own cost services.

Sales Comparison Approach:

Instead, appraisers rely on the sales comparison approach to value these types of items. As appraisers we get to know the communities in which we work. We understand the value of certain features to the residents of that area. We know the traffic patterns, school zones, busy throughways; and we use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or lot view (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property thereby equalizing the properties values.

The Income Approach:

In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.


Combining information from all approaches that are used, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. The appraised value is most often used as the guideline for lenders who don't want to loan a buyer more money that a property is actually worth. The appraiser, by diligently reporting the facts he has generated through his research and knowledge, will help you the homeowner or the lender get the most accurate property value, so an informed real estate decision can be made.

How you should prepare for an Appraisal:

By law, an appraiser must be state licensed to perform appraisals prepared for federally related transactions. Also by law, you are entitled to receive a copy of the completed appraisal report from your lender but, as stated elsewhere it is the duty of the property buyer or owner to request the copy..

For homeowners, a real estate appraisal is an extremely valuable tool for buying or selling their home. It allows the property transactions to be completed among the buyer, seller, real estate agent and mortgage lender. 

It is beneficial if a property owner has the following documents available for the appraiser: 

    A copy of your deed & plot plan or survey plat of the house and land

    Written property agreements, such as a maintenance agreement for a shared driveway

    A list of any personal property being sold with the home

    Title policy that describes encroachments or easements

    Most recent real estate tax bill and or legal description of the property

    Home inspection reports, or other recent reports for termites, EIFS (synthetic stucco) wall systems, septic   systems and wells

    A list of home improvements and upgrades, the date of their installation and their cost (for example, the addition of central air conditioning or roof repairs) and permit confirmation (if available)

    A copy of the current listing agreement and broker's data sheet and Purchase Agreement if a sale is "pending".

    Information on "Homeowners Associations" or condominium covenants and fees.

    A list of "Proposed" improvements if the property is to be appraised "As Complete".

    Information on the last purchase of the property (for three years past)

Once your appraiser has arrived, you do not need to accompany him or her along on the entire site inspection, but you should be available to answer questions about your property and be willing to point out any home improvements.

Some other suggestions:

If it is a morning appointment coffee/juice/doughnuts are suggested or an afternoon appointment snack cakes/chips/soft drinks are acceptable.....hey we are allowed a sense of humor, right?                                                                               

     Accessibility: Make sure that all areas of the home are accessible, especially the attic and crawl space.

     Housekeeping: Appraisers see hundreds of homes a year and will look past most clutter, but they're human beings too! A good impression can translate into a higher home value.

     Maintenance: Repair minor things like leaky faucets, missing door handles and trim.

     FHA/VA Inspection Items: If an owner/buyer is applying for an FHA/VA loan, be sure to ask your appraiser if there are specific things that should be done before they come. Items they may recommend: Install smoke detectors on all levels (especially near bedrooms); install handrails on all stairways; remove peeling paint and repaint the effected area; provide inspection access to the attic and crawl space.

Some Assumptions and Facts About
Real Estate Appraisals and Appraisers

Assumption: Assessed value should equate to market value.
Fact: While most states support the concept that assessed values approximate estimated market value, this often is not the case. Examples include when interior remodeling has occurred and the assessor is unaware of the improvements due to internal lag times from building inspection to the taxing authorities inspection and valuation, or as in rural areas where properties are reassessed over 2-5 year reassessment periods.

Assumption: The appraised value of a property will vary, depending upon whether the appraisal is conducted for the buyer or the seller.
Fact: The appraiser is required to have no vested interest in the outcome of the appraisal and should render services with objectivity and impartiality no matter for whom the appraisal is conducted. Appraiser loyalty is to the valuation process which is the same for all parties.

Assumption: Market value should approximate replacement cost.
Fact: Fair market value is based on what a ready, willing and able buyer would pay a ready, willing and able seller for a particular property, with neither being under duress to buy or sell. Replacement cost is the dollar amount required to reconstruct a property in-kind taking into account depreciation for physical age.

Assumption: Appraisers use a formula, such as a specific price per square foot, to figure out the value of a home.
Fact: Appraisers make a detailed analysis of all factors pertaining to the value of a home including its location, condition, size, proximity to facilities and recent sale prices of comparable properties. These factors are combined as explained in the Approaches to value section above. The price per square foot is better determined after the appraisal process is complete and would only apply to the property appraised.

Assumption: In a robust economy - when the sales prices of homes in a given area are reported to be rising by a particular percentage - the value of individual properties in the area can be expected to appreciate by that same percentage.
Fact: Value appreciation of a specific property must be determined on an individualized basis, factoring in data on comparable properties and other relevant considerations. This is true in good times as well as bad. As an example typical properties in an area may be increasing at a rate of 4-6% annually but properties in the same area with special features such as water or ocean frontage are increasing 25% annually. No "formula" would be appropriate.

Assumption: You generally can tell what a property is worth simply by looking at the outside.
Fact: Property value is determined by a number of factors, including location, condition, improvements, amenities, and market trends.

Assumption: Because consumers pay for appraisals when applying for loans to purchase or refinance real estate, they own their appraisal.
Fact: The appraisal is, in fact, legally owned by the appraisers client. The lender/client has sole ownership of this document. However, consumers must be given a copy of the appraisal report, upon written request, under the Equal Credit Opportunity Act.

Assumption: Consumers need not be concerned with what is in the appraisal document so long as it satisfies the needs of their lending institution.
Fact: Only if consumers read a copy of their appraisal can they double check its accuracy and question the result. Also, it makes a valuable record for future reference, containing useful and often revealing information including the legal and physical description of the property, square footage measurements, a list of comparable properties in the neighborhood at the time of the appraisal, a neighborhood description and a narrative of current real estate activity and/or market trends in the vicinity.

Assumption: Appraisers are hired only to estimate real estate property values in property sales involving mortgage lending transactions.
Fact: Depending upon their qualifications and designations, appraisers can and do provide a variety of services. These include advice for or settlement of estate, dispute resolutions, tax assessment review, cost/benefit analysis, property condemnations and so on.

Assumption: An Appraisal is the same as a home inspection.
Fact: An Appraisal does not serve the same purpose as an inspection. The Appraiser forms an opinion of value in the Appraisal process and resulting report. The appraiser conducts a visit to the property to determine its value. During this visit a clear view of "surface" issues of condition may require an appraiser to provide a list of deficient items to a lender or he may advise that a "home inspection" be conducted by a professional home inspector. This is where the responsibility of "appraisal inspection" ends. An appraiser reports all he sees and advises on "suspect" conditions that may affect value. These conditions are left to the lender and a home inspector to resolve. A home inspector determines the condition of the home and its major components and reports these findings and often the cost to bring the property back to at least "average" condition

What is PMI and how to get rid of it?

Today, companies are eager to lend just about anybody money. Assuming you have decent credit rating, potential home buyers can secure a loan for a house. This is because these transactions are secured by a valuable asset, the home itself. Should a borrower default on a loan, the risk to the lender is often only the difference between the current fair market value of the home and the amount outstanding on the loan, less the costs to foreclose on and resell the property.

Lenders are concerned about lending more than a certain percentage of a property's fair market value. Traditionally, this has been 80 percent. This “cushion” provides some assurance for the lender that their losses from loan defaults will be kept to a bare minimum.

Over the past 10 to 15 years, however, it has become increasingly more common to see home buyers using down payments of 5 to 10 percent and in some rare cases 0 percent. Loaning funds with such low down payments now presents the lenders with much greater risk. To offset this risk, these transactions often require a relatively new innovation called Private Mortgage Insurance or PMI. This supplemental insurance policy protects the lender in case a borrower defaults on the loan, and the value of the house is lower than the loan balance.

PMI has been a large money maker for the mortgage lenders. The amount of the insurance is often $40-$50 per month for a $100,000 house. This cost is commonly rolled into the mortgage payment. Due to the size of the overall payment, this additional fee is often overlooked by home buyers or those refinancing their property. Homeowners often continue to pay the PMI even after their loan balance has dropped below the original 80 percent threshold due to the fact it is often not adequately explained that it can be removed once the “magic” 80% has been achieved. Reaching this point occurs all on it’s own as the loan balance is paid down and property values increase. On a typical 30-year loan, however, it can take a few years to reach this percentage level.

Until recently mortgage lenders were under no obligation to tell home owners when they had reached a point where the PMI can be dropped. This changed in 1999, when the Homeowners Protection Act took effect. In most cases, this law now obligates lenders to terminate the PMI when the principal balance of the loan reaches 78 percent of the original loan amount. More informed homeowners or those who have their property appraised can get off the hook a little earlier. The law stipulates that, upon request by the home owner, the PMI must be dropped when the principal amount reaches 80 percent of a property's fair market value.

It is important to note that this law only applies to home loans for first time or refinance loans that closed after July, 1999. Certain other conditions must also be met such as loan payments must be current and up to date. Buyers that purchased before July 1999 can also have their PMI removed, but they must initiate the process. Though the lender is under no obligation to do so, most will assist in the process.

Another way that home owner's equity can reach beyond the 80/20 percent ratio, as mentioned above, is due to the often significant gains in the value of real estate over the past decade. Some areas have seen appreciation levels of 100 percent or more. People living in areas with more modest gains may find that the value of their property has quickly grown to the point where the amount of principal they owe on their loan is less than 80 percent of the home's current value. In these cases, the lenders are still under no legal obligation to remove the PMI. In many instances, however, as long as the home owner has been prompt with their loan payments and don't represent any exceptional risk, reputable lenders will agree to remove the extra fees. Once again this action must be initiated by the home owner.

It is difficult for typical home owners to know just when their home equity rises above this 80/20 percentage point. As certified, licensed real estate appraisers we can certainly help. It is an appraiser's job to know the market dynamics of their area. They know weather property values have risen or declined as a general rule. Appraisers can offer specific services to help customers find the value of their homes and remove PMI payments. Presenting this data to the mortgage company will most often eliminate the PMI with little trouble. The savings from the removal of PMI will pay for the appraisal in a matter of a few months. The home owner is then free to enjoy the savings.


Now that you know all there is to know about appraisals and their benefits, you are ready to order one or to ask your lender to give us a call. See our appraisal request form or our phone/fax/email information. Thanks for stopping by!