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A real estate purchase is perhaps the most important single investment a person will ever make. Whether it's a primary residence, a second vacation home or an investment property, the purchase of real property is a complex financial transaction that requires the coordinated efforts of multiple parties for effective execution of the many steps involved in completing the transaction.

Some of the parties involved are very familiar to the average buyer/borrower. The Realtor is the most common face of the transaction. The mortgage company or bank provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer. The attorneys and legal assistants represent the interests of the buyer and seller during the contract period and perform the closing of the sale and recording of the deed for the public record

So who makes sure the value of the property is in line with the amount being paid? There are too many parties exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.

This is where the appraisal comes in. An appraisal is an unbiased estimate of the fair market value of real property, where both buyer and seller are well informed and typically motivated parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the fair market value of their property. Appraisal Logic LLC is here to serve both the mortgage industry and the private homeowner with a quality product customized to the specific situation and the expressed purpose of each appraisal.

The Appraisal Inspection
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. The appraiser must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes photos of the interior and exterior of the buildings, measurement of the property ensuring the proper square footage and conveying the layout of the property by use of a basic sketch. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value or marketability of the property.

As a secondary step to the inspection, the appraiser must examine municipal records of the property being appraised to verify that its size and its use meet current zoning requirements and are legally permissible for the specific zone as determined by the city or town. A verification is also made that the "owner on record" (on the deed), is in fact the persons or entity trying to sell or mortgage the property. A copy of the sales contract between the buyer and seller is normally supplied to the appraiser in order to verify the identities of the parties involved and the details of the transaction such as sales price, any seller or buyer concessions, and the property rights being conveyed.  

Once the site and all its improvements and buildings have been inspected, and the municipal statistics for the property have been verified, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.

Cost Approach to value
The cost approach is the easiest to understand but perhaps the most difficult to substantiate. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach. Although the cost approach to value is most effective when valuating homes under construction or a brand new home to be built, this approach to value can be useful for insurance companies to estimate adequate insurance coverage for catastrophic loss. The cost approach is not required by Fannie Mae, but may be requested by some clients.

Sales Comparison Approach to value
Appraisers rely heavily on the sales comparison approach to value for residential properties because this requires evaluating actual sales of similar properties from the same neighborhood of the property being appraised. Appraisers have local knowledge of the market areas in which they perform appraisals. They understand the value of certain features to the residents of that area some that may be intangible. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value to the typically motivated buyer. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject property being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as location, lot size, view, building style square footage, physical condition, amenities and extra features, the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may adjust the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might adjust certain amount to the comparable property.

Income Approach to value
In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Collection and Verification of Data, Formulation of the Appraisal Report 
After the appraiser has performed due diligence in the collection and verification of data, the appraisal can then be formulated. The appraiser must abide by the Universal Standards for Professional Appraisal Practice (USPAP) guidelines as defined by the federal government, using all of the resources and information available, and provide the estimate of fair market value for the specific appraisal assignment.

Reconciliation
Combining information from all approaches, the appraiser is then ready to stipulate an estimated fair market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth. The bottom line is Appraisal Logic LLC will help you get the most accurate property value, so you can make the most informed real estate decisions.

Appraiser Ethics and Fiduciary Reponsibility
Appraisal is a profession, and appraisers are professionals. In our field as with any profession we are bound by ethical considerations and fiduciary responsibilities.

An appraiser's primary responsibility is to the client.  Normally, in residential practice, the appraiser's client is the lender ordering the appraisal. The lender then evaluates the findings of the appraisal to decide whether to make the mortgage loan.  Appraisers have certain duties of confidentiality to their clients and an obligation to attain and maintain a certain level of competency and education, and must generally conduct him or herself as a professional.We take these responsibilities very seriously.

Appraisers may also have fiduciary obligations to third parties, such as homeowners, buyers and sellers, or others. Those third parties normally are spelled out in the appraisal assignment itself. An appraiser's fiduciary duty is limited to those third parties who the appraiser knows, based on the scope of work or other written parameters of the assignment.

There are ethical rules that have nothing to do with clients and others.  Appraisers must keep their work files for a minimum of five years. 

We only perform to the highest ethical standards possible.  We don't do assignments on contingency fees.  That is, we don't agree to do an appraisal report and get paid only if the loan closes.  We don't do assignments on percentage fees. That is probably the appraisal profession’s biggest no-no, because it would tend to make appraisers inflate the value of homes or properties to increase their paycheck. We don't do that. Other unethical practices may be defined by state law or professional societies to which an appraiser belongs.

The Uniform Standards of Professional Appraisal Practice (USPAP) also defines as unethical the acceptance of an assignment that is contingent on "the reporting of a predetermined result (e.g., opinion of value)," "a direction in assignment results that favors the cause of the client," "the amount of a value opinion," and other things. This means you can be assured we are working to objectively determine the home or property value

 Appraisal reviews

The Federal Reserve has recently reiterated that "financial institutions must have an effective, independent real estate appraisal and evaluation program," and that appraisers performing reviews should "have the knowledge and expertise to assess compliance with the Federal Reserves appraisal regulations and guidelines." Here at Appraisal Logic LLC, we use an appraisal review service that is independent, qualified, professional and compliant with the Federal Reserve's guidelines to assure the appraisal you receive is logical, complete and accurate.