Anatomy of a real estate appraisal
REThink Real Estate
By Tara-Nicholle Nelson, Thursday, September 9, 2010.
Q: I know that the city appraises a house for tax purposes. Is this the same method that banks use to appraise homes also?
A: There's a lot of confusion about the value estimates that cities generate for homes, so this is a very astute question. A city's process of estimating the value of a home for purposes of calculating property taxes is usually called a tax assessment, though some cities do call it appraisal. We'll use assessment for clarity's sake to denote a city's value estimation.
In most areas, property taxes are calculated on an ad valorem, or "according to value," basis.
For example, in a place with a 1.25 percent state property tax, each county tax assessor has the job of assessing the value of each home, then imposing a tax of 1.25 percent of each home's value every year, plus local or neighborhood assessments, minus any discounts or exemptions applicable.
Very generally speaking, both cities and mortgage lender appraisers consider the recent sales of comparable homes within a nearby radius of a home as the basis for their opinions of that home's value. But that is a massive oversimplification, both of the assessment/appraisal method, and of the similarities between how assessors and appraisers operate.
For purposes of this post, let's assume we're discussing bank appraisers' methods when they are appraising a home for purchase, not giving a bank an estimate of a home's value for purposes of a loan modification, short sale, or to set the list price of a foreclosure.
Appraisers are paid to answer the bank's question regarding whether it could currently resell that home for the price the buyer and seller have agreed to. As such, appraisers work from the purchase contract and its agreed-upon sales price and any seller concessions to repairs or closing costs.
With that information, and other data about whether the sale was distressed at all (e.g., foreclosure or short sale), the appraiser looks primarily at multiple listing service data about homes with very similar numbers of bedrooms, bathrooms and square feet that have sold within a half-mile radius, and within the last few weeks. Appraisers will expand the radius and the time frame of the search if they can't find at least three to five comparables homes ("comps") to use.
Next, the appraiser visits the site of the home, usually taking both interior and exterior photos, assessing things like the general condition of the home (so as to compare it against the norm for the area), and also checking for any safety hazards that the bank should require be repaired prior to close of escrow (e.g., broken windows, exposed electrical wires, massive wood rot or unsteady decks).
Then the appraiser goes back to the office and does a property-by-property comparison of the "subject" property against the individual comparables, adding or deducting dollars from her opinion of the home's value accordingly when the home is more or less valuable than the comparable, for any reason, like this comparable is newer than the subject property, or that comparable isn't in as good a level of repair as the subject home.
On the other hand, there are generally only a few times a home is assessed for property tax purposes. Most often, homes are reassessed when they change hands -- i.e., when they are sold. And they are generally assessed by default to the value that was paid for them, when they are sold between strangers on the open market, so there's no analysis of comparable sales or site visit that goes on in those cases. The fair market value is assumed to be what a qualified buyer is willing to pay for the home, as shown by what the buyer did in fact pay for the home.
In some states, the assessed values were assumed to rise every year, up to a certain maximum -- for example, in California, assessed values rise up to 2 percent automatically -- until the market crashed. Now, county assessors in almost every state are adjusting assessed values annually on the basis of comparable sales, as reported by the county sales records.
In a few areas, homes are actually subjected to a drive-by site visit from the tax assessor every three or four years, mostly to check the condition of the home so they can more precisely compare it to the homes that were recently sold.
There are really only two other common occasions for a home to be reassessed by a city. First, when a homeowner feels that their home's assessed value (and, thus, property taxes) is too high, they can petition for reassessment due to declining market values and, you guessed it, offer recent comparable sales supporting the lower value they feel the home has on the current market.
Lastly, when a homeowner obtains construction permits and improves his or her home, the home is often reassessed upwards to account for the increased value after the upgrades or remodeling. In these cases, comps are not the primary driver of value; rather, the assessor assigns a value to the additional square feet or amenities added.
Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
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Submitted by randye britt on September 9, 2010 - 6:51pm.
wow, did those folks who wrote the appraisers guide to being a realestate agent see paragraph 5 or show it to their customers. it appears they are paid to make sure the bank can resell the house for the contract price. . notice it didnot say they are paid to determine a freemarket price, or determine an acceptable price or competitive price just one the bank can get their money back . well do they disclose this in their appraisals
Submitted by Kathleen p on September 10, 2010 - 12:16am.
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Submitted by realestaterossi on September 12, 2010 - 2:49pm.
Tara, keep of the good work. The advice is both informative and helpful. But I would like to go a bit further in addressing some of the points. Thanks.
“For purposes of this post, let's assume we're discussing bank appraisers' methods when they are appraising a home for purchase, not giving a bank an estimate of a home's value for purposes of a loan modification, short sale, or to set the list price of a foreclosure.”
The appraiser, either as a State licensed or State certified individual, is required by law and regulation, and consistent with the Uniform Standards of Professional Appraisal Practice (USPAP) 2010-2011 Edition ©The Appraisal Foundation to properly identify the appraisal problem to be solved, determine the scope of work necessary to develop credible results, and disclose the scope of work in the report. As part of “problem identification” the appraiser must identify the “assignment element” - type and definition of value. In nearly all instances referenced in your piece, regardless of how it is characterized, the purpose of the appraisal is Market Value of the Unencumbered Fee Simple Interest.
Market Value is defined as the most probable price which a property should bring in a competitive and open market and under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming that 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 acting in what they consider their best interest;
A reasonable time is allowed for exposure in the open market;
Payment is made in terms of cash in United States 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.
My point being, to suggest that the appraiser has a different “objective” or “goal” other Market Value (or other legally authorized value definition), is to make it appear that the appraiser is biased by the assignment. Whereas, the assignment may, in fact, be for “purposes” or an “intended use” in the context of a loan modification, short sale, or to set the list price of a foreclosure.
However, then came this zinger “Appraisers are paid to ensure that the bank could currently resell that home for the price the buyer and seller have agreed to. As such, appraisers work from the purchase contract and its agreed-upon sales price and any seller concessions to repairs or closing costs.”
That can’t be any further from the truth, even more now in light of all the additional regulations piled on top of FIRREA Title XI (1989), such as HVCC, Frank-Dodd, and revised VA, FHA/HUD policy.
Appraisers are “paid” to develop a credible result (worthy of belief) and preform the assignment with impartiality, objectivity, and independence, and without accommodation of personal interests.
In your description of the Sales Comparison Approach you indicated; “Then the appraiser goes back to the office and does a property-by-property comparison of the "subject" property against the individual comparables, adding or deducting dollars from his/her opinion of the home's value accordingly when the home is more or less valuable than the comparable, for any reason, like this comparable is newer than the subject property, or that comparable isn't in as good a level of repair as the subject home.
A small chart of same might have improved the understanding, because the narrative may be misleading. Good effort though.
Comparable Superior to the subject (-) $ or %
Comparable Inferior to the subject (+) $ or %
Comparable Similar (0) $ or %
Reassessment
“On the other hand, there are generally only a few times a home is assessed for property tax purposes. Most often, homes are reassessed when they change hands -- i.e., when they are sold. And they are generally assessed by default to the value that was paid for them, when they are sold between strangers on the open market, so there's no analysis of comparable sales or site visit that goes on in those cases. The fair market value is assumed to be what a qualified buyer is willing to pay for the home, as shown by what the buyer did in fact pay for the home.”
Municipal/County jurisdictions are often required by State law, to do reassessment periodically, for example every two or four years. As a result homes are not typically reassessed immediately when they change hands.
There is generally a “revision” process available after reassessments so the home owner who disagrees with the reassessed value of the taxing authority can petition for redress. The authority’s often do maintain a database to support the results of the “mass appraisal” prepared for assessment purposes.
Hear again, the statutory “fair value” is similar to the “market value” definition in the transactional example.
The International Association of Assessing Officers (IAAO) is the internationally recognized leader and preeminent source for innovation, education, and research in property appraisal, assessment administration, and property tax policy. (http://www.iaao.org/) It may be helpful to reference the site for additional information related to specific jurisdictions.
Construction Permitting
“Lastly, when a homeowner obtains construction permits and improves his or her home, the home is often reassessed upwards to account for the increased value after the upgrades or remodeling. In these cases, comps are not the primary driver of value; rather, the assessor assigns a value to the additional square feet or amenities added.”
In real terms, the permit often has a “quoted” cost or contract amount, that amount is often considered, in addition to other factors, but doesn’t necessarily get picked-up by the assessing authority immediately, unless direct communications is made in some manner. More importantly, the assessor can not “arbitrarily” assign a value to the property because the “Contributory Value” of the improvement is not readily known and he/she must have direct evidence to support any such change.
Hypothetically, a permit for roof replacement may be a $5,000 job cost on the permit - but, the property had a roof before, and has one after the permitted improvement - did the value go up or down because of the improvement - some possibly, but not a great deal really in the markets perception. The contributory value is hard to equate to the price.
If folks believe they are over assessed, it would be advisable to speak with an appraiser, or even have an appraisal prepared independently. The supporting evidence received from a complete appraisal can be used to support any formal appeal or revision process . Thereby potentially helping to get a savings through reduction of the assessed value based on a formal appeal.
One additional note, many jurisdictions also vote in or vote out “levies” which effectively change the actual rate of taxation applied to the assessed values. So if a levy is added, but values go up or down, real estate taxes may be impacted similarly.
Submitted by Jose Lopez on September 14, 2010 - 4:46am.
I used to be an appraiser and it is unfortunate the control that lenders used to have on the appraiser. It is understandable why they came up with the new rules that lenders must use a middle man to request the appraisal. However, this is causing a new problem because appraisers are required to travel outside of their market areas. Which results in appraisals that are incorrect and sometimes will doom a transaction.
Sarasota Real Estate