Appraisal Terms For New Real Estate Agents
Whether you are a new real estate agent or one who has been in the business for years there may be some appraisal terms that you are not familiar with. Today I thought I would share with you some appraisal-related terms that would be helpful for new real estate agents to know in order to make your job easier when trying to understand appraisals.
1) Appraisal- Let’s start off with the obvious. Most people will know what an appraisal is but we have to start somewhere so we’ll go with it.
Most people mistakenly confuse the report you get with being the appraisal but that’s just the report. The official definition of the term specifies that an appraisal is “The act or process of developing an opinion of value. To build upon that, another definition further specifies that “An appraisal is a supportable and defensible opinion of value.”
This is important to understand because it requires market supported evidence. While appraisers provide opinions of value their opinion is based on data about sales and listings in their specific market area. Again, an appraisal is the act or process that appraisers go through rather than the actual report.
2) Appraisal Report- An appraisal report is a written report that contains data and evidence that supports the
appraiser’s professional opinion of value. It includes numerous items including information about the property being appraised as well as market supported data that was used to arrive at the value.
It also includes exhibits such as a sketch of the property, pictures of the subject and sales as well as maps and other pertinent information. All of this data is included to help paint a picture of what the property is like as well as to support the conclusions arrived at.
3) Home Inspection- People sometimes confuse a home inspection with an appraisal. I wrote about differences between the two more in-depth in another post which you can read but for now, I will keep it short and sweet.
An appraisal is concerned with the market value of a home. It takes into consideration the physical attributes of a home such as its size, condition, quality of construction and features.
The home is compared to other similar homes that have recently sold. Adjustments are made for the market value of the differences between the subject and sales to arrive at an adjusted range of value that the appraiser then uses to reconcile a final value for the subject property.
A home inspection, in contrast, is more focused on the physical condition of the property. This includes a wide range of items from minor repairs to major system maintenance.
In addition, the structural systems of the house are taken into consideration. This includes walls, floors, ceiling, and roof. The electrical and plumbing systems are also studied to determine their condition and whether they meet code.
To keep it short and sweet think about it like this: appraisal=value of the home whereas home inspection=condition of the home.
4) Days On Market- Days on Market, or DOM, is a measure of how long the property has been on the market. It measures the number of days starting when the home went on the market until it goes under contract.
This is an important metric in real estate appraisal because it helps us to understand how healthy the market is. A low DOM can indicate a very hot market or possibly that the home was underpriced.
Opposite of that is a high DOM. This can show a soft market or a home that may have been priced too high.
Appraisers use this information to help in the reconciliation of the final value estimate. If most sales have a high DOM then this indicates a softer market and the value may be reconciled at the lower end due to the lower demand. The lower DOM may warrant a value at the higher end of the range if the market is hot.
5) Adjustment- An adjustment is typically a dollar figure applied to the sale price of a comparable. It represents the
market value of the feature being adjusted for.
For example, if a buyer will pay $20,000 more for a home with a pool that is identical in every other way to another home then the adjustment for a pool in this example is $20,000. If the subject home has a pool but the comparable does not then an upward adjustment is made to the comparable.
Adjustments work this way: if a comparable is inferior to the subject an upward or positive adjustment is made to the comp. If the comparable is superior to the subject then a negative adjustment or downward adjustment is made.
Appraisers strive to choose comparables that require the least adjustments as they are considered more similar. The sales with the least adjustments are usually given more consideration in the reconciliation process to arrive at the final opinion of value.
6) Depreciation- The simplest explanation I can think of for depreciation is a loss of value of a property from various causes. A property’s age can cause it to depreciate and renovating a property can reverse the depreciation.
Functional obsolescence can also cause depreciation if a bad floor plan results in a house selling for less than what it might if the floor plan were more readily acceptable by the market. Depreciation can also be described as the difference in value between the replacement cost of an improvement and its market value.
7) Three Approaches To Value- The three approaches to value used by an appraiser to arrive at value include the cost, income, and sales approaches. All of these approaches may or may not be used in an appraisal because it will depend on how reliable it is based on the property.
The cost approach reflects the cost of constructing a similar home with the same features and finishes. It also takes into consideration the value of the land the home is situated on.
The income approach measures the income-producing capabilities of the property. It is based on how much rental income the property can generate
The sales comparison approach is the most common and recognized of the three approaches. It utilizes comparable sales (comps) to determine what other similar properties are selling for. Adjustments are made for differences and an adjusted range of value is determined. From this range, a final value is reconciled.
The cost approach is most relevant for new construction and the income approach is useful when the subject property is rented and there are numerous other similar rental properties that can be used for comps. The sales comparison approach is pretty much used all of the time because there are usually sufficient comps to compare to the subject.
8) USPAP- This acronym stands for the Uniform Standards of Professional Appraisal Practice. It is the generally
recognized ethical standards that appraisers follow when performing appraisals.
In order for appraisers to become licensed, they must follow USPAP standards.
9) AMC- An Appraisal Management Company (AMC) is a middleman that mortgage lenders use to order appraisals from appraisers. They are set up to minimize contact between the lender and the appraiser and to manage the process.
Lenders can set up a similar type system within their company, however many utilize outside firms to do this. AMC’s charge a fee for their services and this can increase the cost of the appraisal to the consumer.
In addition, it can slow down the process because you have an additional layer of communication that you must go through.
Questions?
I hope explaining these appraisal definitions to new real estate agents will help you understand the appraisal process a little more clearly. If you have a question about any other appraisal terms feel free to contact me and as always thanks for reading.
Thanks Tom. And one thing to consider is we often hear, “I just need a quick value and I don’t need a full appraisal report.” I understand what is being requested, but the appraiser has to go through research to get to the value and may not be able to crank out a quick figure. Can the appraiser put the value on a letterhead that is one page? Heck yes. But that doesn’t mean there is less work involved. Thus the reporting of the value could be really limited, but that doesn’t necessarily mean the work involved in arriving at the value is limited.
Great point, Ryan. Those types of requests have always bothered me because if the value is included in a simple one-page letter it appears that a lot less work is done, which could not be further from the truth. I always charge the same no matter what the reporting format is because it is the same amount of work.
Inferior and superior. If the comparable is superior to the subject, why is there a positive adjustment to the subject?
Chris, thanks for the question. This can be a little confusing. When making adjustments you adjust the comparable to the subject. You do make adjustments to the subject. If the comparable is superior to the subject then a downward adjustment is made. For example, if the comparable is 500 square feet larger than the subject then a downward adjustment must be made to the sale that reflects the additional value of that extra square footage. I hope this clears things up.