In our first entry, we are tackling the question "What is an Appraisal?" which is an excellent place to start since, if you are reading this, I figure you need this valuable (pun intended) information. Oxford defines an appraisal as "an expert estimate of the value of something," which is a good start as far as the word goes, but what is a real estate appraisal, and why would you need one? Simply put, a real estate appraisal is an opinion of value from a real estate appraiser. The key word in that sentence is opinion since an appraisal is not a statement of fact but is an opinion given by an expert in the field. You may ask yourself, what makes an appraiser an expert? In the United States, appraisers must be licensed or certified to be able to call themselves an appraiser at all. There are generally three levels of licensure: Licensed Appraiser, Certified Residential Appraiser & Certified General Appraiser. Each of these licenses allows a person to call themselves an appraiser and operate as an appraiser in the state where it was issued. In contrast, the different license levels allow for more complicated appraisal work to be completed. Licensing is the minimum qualification, though. My grandfather used to say, "What do you call the guy who finished last at Medical School?.... Doctor." Vetting an appraiser should be done to determine their local knowledge and ability to express it combined with their understanding of appraisal practice and techniques.

So is an appraisal always written on a form, or could it be done differently? An appraiser could write an appraisal on something as small as a napkin. However, that is just the report part of the appraisal. The analysis and data may fill a filing cabinet or external hard drive, while the report is just a few lines. Most of the time, the work file itself is only marginally more extensive than the report itself though as much of the information ends up in the report. Depending on the intended use, the report can vary in size and complexity. The only absolute requirement is that it is USPAP (Uniform Standards of Professional Appraisal Practice) compliant. Beyond that, though, the appraiser should help to satisfy the client's needs as long as they are ethical and do not cause the appraiser to violate USPAP.

The most common format that most will see is an appraisal completed for a mortgage transaction constructed on a URAR (Uniform Residential Appraisal Report). FNMA developed this form, and although most appraisers would agree it could be a better form, it does an adequate job of allowing the appraiser to report the appraisal. An appraisal has three value approaches; Sales Comparison, Cost, and Income. For most residential appraisals that the average person will need, a Sales Comparison approach is the most reliable approach. It is also the easiest for most people to digest as it compares recent sales similar to the subject property. Most of the time, those sales are not identical to the subject, so adjustments are needed to account for the differences so that the appraiser can formulate an opinion of value. The other approach, although typically underdeveloped, is the Cost Approach. This approach focuses on what it would cost to duplicate the property, including land, improvements, and depreciation. The Cost Approach is an excellent approach for further support and helps in unique or special properties with few comparisons. The last approach, Income Approach, is less useful for single-family properties but is very useful in 2-4 unit and commercial properties. This approach uses rental income or other income generated by the property. Revenue generated is multiplied against a multiplier developed by examining market rentals that would compare. Appraisers can use the combination of these approaches to value everything from a piece of swamp land to the Governor's Mansion.

Stay tuned for our next entry to dig deeper into these topics and many others!