There has been a lot of attention in the media about appraisals and their use in real estate. Most of the questions focus on what an appraisal is, the difference between an appraisal and an assessment, when an appraisal will be done, and when else could an appraisal benefit a property owner or buyer.
What is a real estate appraisal?
The overall definition of an appraisal is a valuation of property, done by an authorized person, of real estate, a business, a collectible, or an antique. In New York state, real estate appraisers are licensed by the Department of State (DOS) for a two-year period.
The DOS states that “A Real Estate Appraiser is a person who develops and communicates real estate appraisal and who holds a current, valid certificate issued to him or her for either general or residential real estate. Real Estate appraisal means an analysis, opinion or conclusion relating to the nature, quality, value or utility of specified interests in, or aspects of, identified real estate.” Licensees are required to take 28 hours of continuing education every two years. Of that, 11 hours are prescribed, and the rest are electives.
A real estate appraiser looks at the property for sale, including the interior and exterior of all the buildings on the property. While on site, they may measure, take pictures, and use other methods to help them.
An appraisal is not a home inspection. For certain government loans, the appraiser may require an improvement be made, however. Also, for the appraisal, certain items need to be working order.
After the visit, an appraiser will look at comparable properties in the area to come up with an opinion of value. This may include adjustments for features present in one property and not in another, a difference in square footage or lot size, age of the structures on the property, etc. If it is a commercial property, the appraisal will take other factors into consideration such as what the property will be used for, potential risks, etc.
What is the difference between an appraisal and an assessment?
Back in the August 2017 NNY Business, I wrote about assessments. The column was based on an interview I did with Brian Phelps, the Watertown city assessor. Like appraisals, assessments are opinions of value. The difference is that an appraisal is looking at one property compared to others and assessments are looking at a group of properties.
Another way to think about this is that if a property that is assessed for $150,000 sells for $160,000, it does not mean that the property will automatically be taxed on the $160,000 assessment. If enough properties in an area increase in value, then that may affect assessments. On the other hand, an appraiser may use that same property in a comparison with an area property that is for sale.
Appraisals look at a point in time (the date the appraisal was done) while assessments are based on an earlier date, usually as of the date the tax roll was submitted. This could mean that the assessed value and appraised value may be quite different.
When does an appraisal need to be done?
A lender will generally require an appraisal prior to approving a mortgage or a refinancing a loan. The lender needs to be sure that the property being mortgaged is worth the value of the mortgage loan.
If the appraisal comes out lower than the amount of the potential loan, there are several possible options that can be explored before the lender denies the loan. The first is for the buyer and seller to renegotiate the deal and agree on a lower price. The second is that the buyer can come up with more cash for the deal. In either case, a smaller loan would be needed. For instance, the agreed price for a property is $100,000. The buyer is making a down payment of $10,000 and wants to borrow the remaining $90,000. The appraisal comes back with a value of $80,000. The buyer or seller or both would need to make up the difference to keep the sale from falling through.
When else are appraisals used?
Appraisals can be done for reasons other than to prove value for a loan. An owner can hire an appraiser to give an estimate of value prior to selling a property or challenging an increase in an assessment. Similarly, a cash buyer can hire an appraiser to be sure the property the owner has for sale is worth the asking price.
Appraisers are a valuable partner in a real estate transaction. They provide a neutral set of eyes that are not tainted by a seller’s price or a buyer’s wallet.
Johnson Newspapers 7.1
This content was originally published here.
