Licensed and certified appraisers are governed by the Uniform Standards of Professional Appraisal Practice (USPAP), an imposing document which boils down to: "be competent, be honest, and disclose what you're doing so everyone understands it."
If only it were so simple.
Every appraiser has their own way of doing things. Compline Group appraisers will usually come to the door and introduce themselves first, then measure the outside of the home. If helps if you open garage doors and patio gates so the appraiser can get all the way around the house. If you have dogs, introduce us to the dogs before you leave us alone with them!
Once we've measured the outside we come in and walk through the inside, drawing an interior floor plan and making notes of the features and condition of your home. We usually take interior photographs in every room, so be prepared. By the time we've walked through the house we've accumulated a list of questions to ask you.
If you live in a subdivision where the homeowner association fees are mandatory, we'll need to know how much the fees are and what they cover.
The appraisal inspection usually takes between 30 and 60 minutes, depending on how complex your house is and how much thorny landscaping is next to the building. Please remember that the time we spend in your home is only a small amount of the time that goes into preparing your appraisal report. Before we come to your house we've already spent a considerable amount of time doing market research.
After we're done inspecting your property we drive around your neighborhood, looking at homes that are currently listed or have sold recently. Then we go back to the office, analyze the data, and pull it all together into report form. The actual appraisal inspection is the least time-consuming part of the whole process.
If you want to see an appraiser cringe, tell them "I had an appraisal done a couple of years ago. They came in at (enter exhorbitant dollar amount here, definitely out of line with the current market), but I don't have the report..."
Why is this a problem? Because without the report we have no idea what the previous appraiser did. Or why. We can't tell if:
So how does an appraiser determine the value of your home? First they determine the physical characteristics of the property. Then they do a bunch of analysis to determine the value. Basically there are three ways to do this:
Appraisers will use one or more of the applicable methods for determining the value of a property, then reconcile those results into their final "opinion of value." Typically the three approaches to value come up with slightly different numbers. The process of reconciling all of that information into one number is somewhat subjective. The final number should be clearly supported by the different approaches to value, and there should be a good explanation of the appraiser's reasoning in the report.
The Market Data Approach is the most useful approach to valuing most residential properties.
Also known as the Sales Comparison Approach, the Market Data Approach compares the subject property with recent sales in the area ("comparable sales" or "comps" for short). The more similar the comps are to the subject, the easier it is to determine the subject's value.
For example, House A sold last month at $300,000 and it was 100 square feet bigger than the subject. House B sold for $290,000 and it was 100 square feet smaller than the subject. House C sold for $295,000 and it was just right--the same size as the subject. There were no other apparent differences. So therefore, the subject must be worth $295,000, right?
Well, maybe. In this case $295,000 looks pretty solid because we are using fake data. In real life there might be three seemingly identical homes and one might sell for $287,000, another for $299,000 and the third for $260,000. Yikes. After a little research you might find that the 260,000 sale had been vandalized inside and needed work. But what about the other two homes, which really do seem to be identical? And how much is yours worth, since it's the same model?
Answer: It's probably worth between $287,000 and $299,000. If anyone tries to tell you "It's worth $296,872 and not a penny more," get another opinion. No one can figure a market value that accurately. If other sales in the area also support a range of $287,000 to $299,000 and the market hasn't changed since the comparables went under contract, your home will probably sell in that same price range. Where it actually sells depends on how you and the buyer feel during the negotiations. Or maybe it depends on the color of your carpet. If you have a pink carpet and the buyer likes pink, they may offer $299,000. If the buyer hates pink they may only be willing to pay $287,000 since they will probably be replacing the carpet. At some point it becomes too subjective to call.
Most people want a specific value when they get an appraisal. This is where the "art" of residential appraising comes into play. Statistical analysis can help to narrow down the range of value. But in the end, the actual number that's placed in the report is the appraiser's judgment call. That's why it is called an "opinion of value."
The Income Approach applies to investment property. Most investment property is expected to produce a positive cash flow. In the case of residential property the cash flow usually comes from rents collected. An appraiser using the Income Approach will determine the estimated market rent for the property. Then they will apply a multiplier to that market rent to estimate the amount a typical investor would be willing to pay for the property, given the amount of income it's expected to produce. Multipliers are generated from analyzing sales and rents of similar income properties in the area. It's a complex process that applies more to multi-unit housing, and often isn't as useful for valuing single family residences.
The Cost Approach estimates the cost of reproducing your home on the same site given current construction costs, and then depreciates it for aging and other factors. This approach works well for relatively new homes, but it can be difficult to determine how much depreciation has actually occurred in older homes.
Even brand new homes can have some depreciation. If a home is drastically overbuilt for an area it is unlikely that the owner of that homes is going to recover the full cost of construction, even for a new home. Take the luxury home market, for example. Billionaire A spends $20 million building his dream home, then decides to sell it. He puts it on the market for $20 million, figuring that's a fair price since it's what he put into the home.
The problem is that his dream home happens to be lime green throughout, except for the purple kitchen. It has an Olympic sized curling facility which takes up a significant chunk of the back yard, and it only has one bedroom. Sure, it cost $20 million to build, but no one else is going to pay him $20 million for it.
This kind of overbuilding is called "functional obsolescence," and it is factored into the depreciation of the home in the Cost Approach.