UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE

 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:

1. you're remembering correctly,
2. the appraisal was subject to remodeling that never happened,
3. the appraiser did a drive by appraisal and your house looks ok from the street but is a mess inside, or
4. the market changed.  It happens, in both directions.

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: 

1. The Cost Approach
2. The Income Approach
3. The Market Data Approach

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 $500,000  and it was 100 square feet bigger than the subject. House B sold for  $470,000 and it was 100 square feet smaller than the subject.  House C  sold for $485,000 and it was just right--the same size as the subject.  There were no other apparent differences. So therefore, the subject must  be worth $485,000, right?

Well, maybe. In this case  $485,000 looks pretty solid because we are using fake data. In real life  there might be three seemingly identical homes and one might sell for  $487,000, another for $499,000 and the third for $460,000.  Yikes.  After  a little research you might find that the $460,000 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  $487,000 and $499,000. If anyone tries to tell you "It's worth $496,872  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 $487,000  to $499,000 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 $499,000. If the buyer hates pink they may only be willing to  pay $487,000 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.