Anatomy of an appraisal report

Not Everyone is an Appraisal Geek

Really? Sometimes appraisers take it for granted that everyone knows what the different parts of an appraisal report are and how to readWHAT IS AN APPRAISAL it, but I’ve found that just isn’t the case. This unfamiliarity, and the cryptic nature of the appraisal form, combine to make it very difficult to know where to look and find useful information in the report, so I’m going to break it down to make it as easy to understand as possible. Just so you will know there are several basic appraisal forms but each has essentially the same information. There are forms for single family homes, condominiums, and manufactured homes and the order of information is very similar.

Page One

The first page of the appraisal report is dedicated to the subject property. It will describe the following:

  • Address and legal description.
  • Information about the sales transaction if it is for a purchase.
  • Details about site size, zoning, utilities, and flood zone information.
  • Information about the finishes of the house such as hardwood floors, sheetrock walls, etc. and and their condition.
  • Information about the number of total rooms in the house, including the number of bedrooms and bathrooms
  • Total heated and cooled square footage of the house, commonly referred to as Gross Living Area (GLA).
 Page Two

Page two is the meat of the report because it contains all the information used to determine the appraisers opinion of value for the home. This page has three sections:

  • Sales comparison approach.
  • Income Approach.
  • Reconciliation of different approaches to value and final value estimate.

The sales comparison section is contained within the “grid” section. This grid contains information on the sales used in the report. While only three comparable sales are required appraisers may use more closed sales as well as homes that are under contract and actively listed for sale. Below is a sample of the “sales comparison grid”.

APPRAISAL REPORT SALES GRID

Subject Property

The subject information is located on the left hand side of the grid with the comparable sales being to the right of the subject information. The main features considered to impact value are the following

Location- Where your home is located impacts value and if your home is in a superior or inferior location compared to the sales then an adjustment is made here

Site- This is for differences in site size and for the value related difference associated with it.

View- Sometimes the view of a lake, golf course, mountains, or city skyline will influence value.

Design- This is one of the areas that can be confusing because of the abbreviations that we have to use. The above example shows the following: DT1;Garden. The “DT” shows that the house is a detached unit, the “1” shows that it is one story, and “Garden” shows the style, which is Garden home.

Quality- The quality rating ranges from Q1 to Q6, with Q1 being the best quality and Q6 being the lowest quality.

Age- Appraisers look at both actual age and effective age because updates and renovation can can reduce the actual age and increase value.

Condition- This is closely related to age and the better the condition the home the higher value you will get. Condition ratings from C1 to C6 are used, with C1 being the best condition such as a new house.

Above Grade Room Count/Gross Living Area- Details about the number of rooms, including bedrooms and baths, and the gross living area (GLA) is listed here. Keep in mind that this is for those floors of the home that are above grade, meaning that no part of the floor is below dirt.

Basement & Finished Rooms Below Grade- This is where areas below grade are listed along with the square footage of finished and unfinished areas. The example is a slab home so it is a little easier to read, with all areas showing “0”. A home that has a total basement area of 1500 square feet, with 700 square feet of finished area would look like this: 1500sf700sfwu. The “wu” at the end stands for walk-up, which describes the type of basement exit.

Functional Utility- If a house has a bad floor plan and it effects its value the adjustment is made here.

Heating/Cooling- Differences between central heating and air units and window air units (or other types of systems) is made here.

Garage/Carport- Types of parking include garage vs. carport or even the number of each.

Porches, Patios, and Other Features- This area is for pretty much all other features such as fireplaces, fences, pools, storage buildings, home theater systems, etc.

Comparable Sales

The sales used in the report are listed next to the subject with adjustments made for any value related difference between the subject and sales in the categories mentioned above. If the subject has four bedrooms and the comparable has three then the subject is considered superior to the comp and a positive adjustment is made to the sale to bring it to the level of the subject. If the comp is superior to the subject a negative adjustment is made. These types of adjustments are made for each category listed above and by doing so the comparable is made more similar to the subject.

These adjustments impact the original sale price of the comp and at the bottom of the grid a range of “adjusted sales prices” is provided. The sales (however many are used) then provide a range of value that the appraiser uses to reconcile a final value estimate.

At the bottom of the grid two adjustment percentages are shown:

Net Adjustments

The net adjustment reflects the addition and subtraction of the various adjustments for each comparable. The figure arrived at is then divided by the original sale price to get the net adjustment.

Gross Adjustment

The gross adjustment represents the addition of both the negative and positive adjustments (regardless of whether it was a positive or negative adjustment), which is then divided by the original sale price to get the gross adjustment.

Underwriters typically look for net adjustments less than 15% and gross adjustments less than 25%. The thing to remember is that the greater the gross (or total) adjustment of the sale the less similar the comparable sale is to the subject because you had to make so many adjustments. A perfect comparable would not require any adjustments and the net and gross adjustments would be 0%, however this does not occur often. This is why it is important to use sales that are truly comparable to the subject so the gross adjustments are minimized. I’ve talked about bracketing before and why it is important when choosing comps. By doing this the gross adjustments are minimized.

Other areas that underwriters focus on when scrutinizing the comps appraisers use include the following:

  • Comparable distance is considered but should not be a determining factor if the comp is located in a similar market area. The only time this should be a problem is if there are legitimate sales in the neighborhood or nearby that were not used.
  • Lenders prefer sales within 90 days if possible because they reflect what is occurring in the market right now as opposed to 6 months age. If older sales are used and changes in the market have occurred then adjustments should be made.

There are always exceptions to these rules however the appraiser must document why the sales used were included and why others may have been excluded. If there are legitimate reasons then these should be included to explain to the underwriter why it was done.

Lets take a look at the the three traditional approaches to value used to determine value:

Sales Comparison Approach

This approach to value is typically given the most consideration in an appraisal. It reflects the actions and motivations of buyers and sellers in the subjects market area.

Cost Approach

The cost approach provides an indication of value based on current construction costs as well as the value of the underlying land. This approach is most relevant for new homes and less reliable for older homes because of the difficulty with accurately estimating depreciation.

Income Approach

This approach is typically not included for owner occupied residential properties. It does provide a reliable indication of value when there is adequate income data such as when the subject is in an area that has numerous properties that are rented and this information is readily available.

Reconciliation and Final Value Estimate

The reconciliation and final value estimate takes all of the information from the various approaches to value used and uses it to formulate a final value estimate for the subject property while also taking into consideration the general and neighborhood market conditions. This is where the appraiser explains why he placed more emphasis on certain sales or certain approach to value and possibly explains reasons for adjustments they made.

Remainder Of The Report

The rest of the report consists of:

  • addendums
  • certifications
  • copy of appraisers license
  • subject and comparable photos
  • floor plan sketch
  • location map

These exhibits are all used to support the final opinion of value and should be included in all reports.

I hope this has been helpful to you in understanding the appraisal report. If you have any questions about the appraisal form and the information included on it leave me a message below and I will get back with you.

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