I recently came across this great graphic by Title Source that goes through the home appraisal process and the appraisal basics. It briefly discusses what an appraisal is, why it is necessary, what appraisals are based on, what homebuyers need to know, appraisal myths and truths, etc. In the coming months, I will be unpacking each of these topics and going into more detail about each of the items shown in the “flowchart” to “pull back the curtain” in an effort to educate the consumer on the appraisal process and what they need to be aware of.
"An unbiased, professional opinion of value"
In the graphic they define the word "appraisal" as: "An unbiased professional opinion of value." For this first post in the series, let’s take a closer look at what those first three words really mean.
The word "unbiased" is pretty straightforward but what does it mean in relation to being a real estate appraiser? Essentially, it means that an appraiser is charged with being an independent party that cannot advocate for either side of the transaction. Appraisers should never advocate for a client's objective. Often a homeowner is hoping for a certain outcome. For example, if they are applying for a mortgage refinance or Home Equity Loan, they are wanting a higher appraised value. But if they are appealing their property taxes or settling an estate and planning on buying out the others in the estate, they most likely want a lower value. Another good example of this is when the intended use is for a divorce appraisal and we are asked to determine market value for a property that is owned by two people going through a divorce. Just because one spouse hires an appraiser doesn't mean that the appraiser is an advocate for their client. No, an appraiser's role is to provide an unbiased, well-supported opinion of value. This one word alone is an important one that separates us as appraisers from every other person involved in the transaction
The word "professional" could have easily been omitted from their definition of appraisal but it's telling that it was included. One reason is that all appraisers must be licensed and adhere to a professional set of Standards and Ethics as detailed by USPAP. We must take extensive amounts of appraisal coursework and also acquire a significant number of hours working on appraisal reports before becoming a licensed and certified appraiser. In order to maintain our license, we must also take a minimum number of hours of continuing education every 2 years. All of this means that appraisers are continually engaging with other appraisers and keeping abreast of the latest trends and changes in the appraisal profession. These experience and education requirements in combination with USPAP holding appraisers to a uniform standards and ethics, gives appraisers the tools and expertise in valuation methods and best practices. It is for these reasons that I believe the word “professional” is an important one.
Finally, we get to the word "opinion". While there is a lot of science involved and standard accepted methodology, there is also an art to appraising and the results are often subjective. Two appraiser can be hired to appraise the same property and may come to different value conclusions. Now, if they are both good appraisers with a strong knowledge of the market area and have well-researched and supported opinions of value, then the two opinions of value should be fairly close (typically within 5%). Real estate markets are imperfect due to many factors including different buyer/seller motivations and we cannot always account for some of these unknowns. However, we are trained to analyze all market data including interviewing market participants and use this information to provide an opinion of value that is indicative of the most probable sales price of a property.
So to summarize, you can reach out to any number of people to get an opinion of what your home might be worth. Each person is going to have an opinion based on, at the very least, their own experience and possibly their own best interest. But an appraiser follows a standardized set of best practices, analysis, and methodology that leads to a professional opinion of value that is above-all unbiased and well supported.
THE HOME APPRAISAL PROCESS - What you need to know as the buyer
To see the full graphic to see other topics I will be covering click the button below. For Real Estate Agents, this may be a useful tool to provide your buyers/sellers with as a brief overview of the process.