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What is an Appraisal?
An appraisal is nothing more than an opinion of value, and anyone can have an opinion. However, in 1989, in the aftermath of the $400 billion savings and loan debacle, Congress passed a bill mandating all states to set up licensing programs for appraisers. Their intent was to help prevent the kind of shaky loans that led to the biggest taxpayer bailout in history. California began licensing appraisers on November 1, 1992.
Licensed appraisers must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP), which became effective in 1993. These rules have established a high level of professional and ethical standards which all licensed appraisers must follow.
Appraisers include people who estimate business value, personal property value and real estate value, as well as those who offer consulting services in these areas. To become licensed, an appraiser must take a series of prescribed classes, demonstrate experience and competence, pass an examination and take continuing education courses.
There are a number of occasions when you might need an appraiser.
Getting a Real Estate Loan
When you apply for a real estate loan, the lender hires the appraiser. Some lenders may let you select the appraiser of your choice, but they make the final decision. You may pay for the appraisal, but the lender is the appraiser’s client.
Lenders need to know what a property is worth before they can make a loan secured by the real estate. If you stop making payments and they have to sell your house through foreclosure, they want some reasonable assurance that they will get their money back. Lenders also base their decisions on your ability to pay (your income and expenses) and your willingness to pay (your credit history).
Recently, the lending industry has become highly competitive. Banks are merging, streamlining the loan process, closing branches and installing automated tellers. Lenders are increasingly using unlicensed appraisers, limited “drive by” appraisals, and computerized “automated valuation” models to support their loans. Today, you may be able to buy a house, refinance or get a home equity line of credit without ever seeing an appraiser.
A lot of appraisers who only work for lenders are going out of business. Other appraisers are now marketing a wide variety of services directly to the public.
Estimating the Value of a Business
You may need an appraiser if you buy or sell a business. Business appraisers estimate the value of a going concern by analyzing the ledgers, the equipment, the inventory, accounts receivable and even intangibles such as “good will.” Certified Public Accountants often do business appraisals.
Estimating the Value of Personal Property
There are a variety of appraisers who specialize in particular types of personal property, such as industrial equipment, art, antiques, musical instruments and even coin and stamp collections. You may need these items appraised for insurance, inheritance or donation purposes.
Special Types of Real Estate
Some appraisers specialize in unique and unusual types of property such as golf courses, bed and breakfast inns, campgrounds, health clubs and even contaminated sites. If you are buying or selling a special type of real estate, you may need an appraiser who is a specialist.
In urban areas, appraisers can specialize in residential or commercial real estate. But in rural areas there are fewer appraisers and they have to be generalists. In addition to residential and commercial properties, rural appraisers need to know something about farms and ranches, timberland, condemnation work and complex mixed use properties.
Listing Appraisals
If you want to sell your property in the least amount of time, it’s important to list it at or near market value. This is especially important in an oversupplied market with many competing properties and few buyers. Realtors usually perform a free “comparative market analysis” to help establish a listing price. However, sometimes an independent appraiser is needed for complex properties or to convince sellers to lower their asking prices.
Buyer Appraisals
Potential buyers, especially those from out of town who are unfamiliar with the local real estate market, need to know what a property is really worth before they make an offer. Sellers can sometimes be overly optimistic when setting a listing price. Buyers sometimes want an opinion of value from someone who is not connected with the sale.
Dissolutions and Buyouts
People often own property together as married couples, partners or groups. When partnerships or marriages dissolve, it’s often necessary to estimate the market value of the various interests to allow the co-owners to buy from or sell to each other. The market value of a small minority interest is often less than its actual percentage of the total property value (the minority partner has less property rights). Appraisers can estimate appropriate discounts for these minority interests.
Rent Surveys
Whether you’re a landlord or a tenant, it’s important to know what sort of rent and lease terms are appropriate for your market. Appraisers can conduct rent surveys to determine the market rent for any particular property.
Leasehold and Leased Fee Interests
When a tenant has a long-term lease at less than market rent, they own a type of property right called a “leasehold interest,” which has market value. Appraisers can estimate the tenant’s leasehold interest and the landlord’s corresponding “leased fee” interest.
Probate, Estates and Trusts
Current Federal tax laws levy substantial taxes on estates with a market value over $600,000. Real estate appraisers can have a profound effect on estate taxes by providing an accurate estimate of market value. Appraisers can also provide valuation expertise to attorneys and financial planners for estate planning, setting up trusts and distributing assets.
Charitable Donations
Charitable donations can provide large tax deductions for some people. Appraisers can estimate the value of charitable donations, including complex arrangements such as life estates and conservation easements.
Expert Testimony and Litigation Support
Appraisers assist attorneys with a variety of services including trial preparation, research, analysis, deposition reviews and expert testimony.
Casualty Loss
Appraisers assist property owners and insurance companies in determining casualty losses from fires, floods, storms and other disasters.
Easements and Boundary Line Adjustments
When property owners need to adjust a boundary or negotiate an easement, appraisers can assist in this process and estimate the effect on market value.
PMI Removal
Homeowners who must pay costly private mortgage insurance (PMI) are entitled to have it removed when their equity exceeds 20 percent of market value. Appraisers can provide the necessary support for PMI removal.
Property Tax Appeals
The appraisers in your County Assessor’s Office may be able to help you reduce your property taxes at no charge.
Condemnation and Partial Takings
Government agencies are required to pay “fair market value” when they condemn or acquire private property for road widening, utility rights-of-way and other public purposes. Appraisers can assist both private property owners and government agencies in this process.
Timberland
Professional foresters can conduct a “timber cruse” to estimate the volume, quality, harvestability and market value of merchantable timber. Appraisers can work with professional foresters to estimate how merchantable timber contributes to overall property value.
Highest and Best Use Analysis
A thorough highest and best use analysis can help the property owner decide whether to buy, sell, lease, hold for future development, divide, consolidate, build, remodel or demolish. For income-producing projects, a highest and best use analysis can help determine the best design, including the optimum size and number of units.
Market Analysis and Site Selection
The US Census Bureau predicts that California will add 18 million people to its current population of 31.3 million by the year 2025, almost a 60 percent increase. Some appraisers are already using sophisticated geographic information system (GIS) technology to help their clients uncover new markets and select the best development sites.
Conservation and Environmental Protection
Appraisers help land trusts, open space districts and other conservation organizations with donations, easements, acquisitions and land swaps.
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