We have found that often there is some confusion about what a real estate appraisal is and what it is not. To clear up some of the confusion here are just a few things that an appraisal is not.
A real estate appraisal is not the same as the assessed value from the appraisal district.
Homeowners receive every year a tax bill based on the assessed value of their property. The tax report may even refer to a value as the market value however this is not the same as the market value of a real estate appraisal for lending purposes.
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
buyer and seller are typically motivated;both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
a reasonable time is allowed for exposure in the open market;
payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. ( FannieMae)
The tax appraised value or assessed value purpose is used to determine property taxes. If you are thinking about selling your home you would not look at your tax value to determine the price to sell. A real estate appraisal will determine the market value for many purposes, the most common is for mortgage lending. Both values are performed by licensed appraisers however the purpose and method differ. Assessed Value is for taxation purpose and uses a mass appraisal process which does not include an inspection of the property. Appraised value is used for more many purposes (mortgage lending, tax appeal, estate settlement are a few examples) and does not use mass appraisal process. The real estate appraisal process includes inspection of the property, market analysis and finds comparable sales used to determine the market value at a specific date.
A real estate appraisal is not determined by a specific formula.
There are often those that will try to determine value with a specific formula. An example of this is when someone will determine the value of a property based only on price per square foot. "My property should be valued at $250,000 since these sales in my neighborhood sold for $100 per square foot and my home is 2,500 sq ft". If it were only that simple! The truth is that a real estate appraisal is based on many calculations and methods of determining value. The square footage is useful and is considered but there are many things to consider raher than just one aspect of the property. Other items of consideration include location, amenities, condition, quality of construction, age, view. This is not a complete list but gives you an idea of the analysis that is part of the appraisal process. For more information about the appraisal process click here for The Appraisal Foundation Brochure.
A real estate appraisal inspection is not the same as a home inspection.
These two are often confused with each other but they are very different in their purpose and scope. An appraisal inspection is performed by a licensed real estate appraiser whereas a home inspection is performed by a licensed home inspector. The purpose of the appraisal inspection is to determine the condition of the home and note features when compared to similar properties within the market. The purpose of a home inspection is to determine the functionality of the homes systems, such as heating/cooling, plumbing, and electrical. The home inspection can find any potential hazards that are not easily observed from visual inspection. Since an appraiser is not a licensed home inspector and is not trained in determining the functionality of the systems a home inspection is recommended when purchasing a home. A home inspection report only reports on the condition of the property and does not include a market valuation of the property. You can find more information about these differences at our post: Appraisal Inspection vs Home Inspection
A real estate appraisal is not owned by the borrower.
It is often confusing for borrowers when they are applying for a loan for a real estate transaction. The borrower pays for an appraisal however the appraisal is ordered from the lending institution and belongs to the lending institution. The lender chooses the appraiser to perform the appraisal. If the borrower chooses not to use the lending institution and chooses to use another lender the appraisal that was completed cannot be transferred to the new lender without release from the original lender. In a real estate transaction the appraisal is performed by request of the lender as the real estate will be collateral for the loan. The lender uses the appraised value to determine the amount they will loan. The lender often has requirements for their appraisals. The appraiser must be unbiased in their opinion and cannot be pressured by the lender, a real estate agent or the borrower. The Equal Credit Opportunity Act has been amended and now borrowers are to receive a copy of the appraisal. For more information look here: ECOA Valuations Rule.
There are some things that borrowers can do if they are dissapointed with the appraisal. For information on what to do if the appraisal is not what you expected you can read our post here: Things to Know and Do When the Appraisal is not What you Exected
A real estate appraisal is not the same as the Zillow "Zestimate".
In today's internet age consumers have access to much more data than in the past. Zillow now offers what they term as a "Zestimate" which is an estimate of market value for a property. We will often have homeowners inform us of their Zillow Zestimate hoping that the appraisal will be close to the Zestimate. The Zestimate sometimes can be close but most often it is not. The problem with estimate is that it lacks the accuracy of an appraisal. The Zestimate is a value based on a formula derived from their data. The Zestimate will be less accurate as Zillow's data is based on user inputted data which can be inaccurate and county records which are not always accurate or up to date. The Zillow Zestimate does not consider or know such things that appraiser considers like the condition of the home and comparables, possible external influences like a busy street or railroad located nearby or future industrial plant that is being constructed nearby. Zillow does a good job of explaining that the Zestimate is not an appraisal here: Zillow Zestimate.
As with any data that is available we have to analyze the accuracy and reliability of the source. If you are thinking about listing your home Zillow can be a starting point but since the values can be as much as 20% different we recommend getting a pre-listing appraisal from a reliable appraiser in your market or contact reliable real estate agents.
We hope this clears up some of the confusion regarding real estate appraisals. If you have additional questions regarding real estate appraisals please contact us at www.dwslaterco.com.
Disclaimer: All information deemed reliable but not guaranteed. The information is meant entirely for educational purposes and casual reading only and is NOT intended for any other use. This information is NOT intended to support an opinion of value for your appraisal needs or any sort of value conclusion for a loan, litigation, tax appeal or other potential real estate or non real estate purpose. If you’d like to obtain additional information or order an appraisal for your specific needs, please contact us at www.dwslaterco.com.