All your questions answered
What is an appraisal?
DEFINATION OF APPRAISAL
An appraisal is defined by The Dictionary of Real Estate Appraisal, 4th Ed. (published by the Appraisal Institute) as “the act or process of developing an opinion of value; an opinion of value”. An appraisal may be reported orally but is usually presented primarily in the form of a document, whether printed or electronic. Because an appraisal is not a statement of fact but rather an opinion, it is entirely possible that different appraisers may arrive at different values for the same property under identical circumstances.
When developing an opinion of value, it is crucial that the specific type of value be specified. Contrary to common belief, there are multiple types of value. Market value is the type of value most often intended when the term “value” is used without qualification, and indeed most appraisals are conducted for the purpose of determining market value. However, appraisers may be asked to form opinions of other types of values such as disposition value (the anticipated selling price that could be attained when the property must be sold within an unusually short period of time), going-concern value (which includes not just real estate but rather both tangible and intangible assets of an operating business), or investment value (which is based on the requirements of a specific investor or class of investors rather than a typical market participant).
I am attempting to obtain bank financing for a property. Should I personally hire the appraiser for this purpose?
While hiring the appraiser yourself and getting an appraisal as soon as possible may seem like a good idea in this situation, in all probability it is not the best approach. Many banks, as a matter of standard operating protocol, will only accept an appraisal that was specifically ordered by the bank itself for specific purposes. An appraisal prepared without the bank’s prior order may well be considered unacceptable. This applies even if the appraisal contains all the information they would normally expect, and even if the appraiser is on the bank’s list of approved appraisers. Therefore, it is not safe to assume that a bank will accept an appraisal that you ordered on your own in order to obtain financing.
I am considering the purchase of a specific property. Should I hire an appraiser to help me establish a reasonable purchase price?
Absolutely. The purchase of real estate, whether a single-family home or an apartment building with dozens of apartment units, is a complex undertaking with substantial sums of money involved. Even if you are already familiar with the particular market in which the property is located, an appraiser will provide an unbiased expert opinion of value and can highlight important market information and trends that will guide you and give you confidence in making your purchase offer on the property.
I own a minority interest in a corporation that owns real estate primarily. I am considering selling my interest to my partners. Is a formal appraisal required to estimate the value of my minority interest?
The valuation of a minority interest in a real estate corporation involves unique factors in arriving at a fair estimate of market value. Most often, a discount will be taken to reflect the inherent characteristics of a minority interest. Determining this discount requires information and that can be difficult to obtain. It is an excellent idea to retain the services of an experienced real estate appraiser in order to ensure that you attain a fair price for your interest. Additionally, if a court is involved, it is almost certain that an appraisal will be required to determine the fair market value.
I own real estate and would like to transfer some or all of the ownership to my children for gift tax purposes. Do I need an appraiser?
In such situations, the IRS will most likely want to know that you are not artificially inflating or deflating the value of the real estate as reported. Unlike other property such as automobiles or gold, real estate is not a commodity with easily known value, as no two pieces of real estate are exactly alike. An appraisal will therefore normally be needed in order to determine the market value of the property for tax purposes. We will work closely with your accountant, attorney, or other tax professional and see to it that your interests are properly represented.
I need to hire an appraiser. What do I need to know about an appraiser’s licensing and insurance? Does experience matter? How important is it?
Licensing: At minimum, all states require licensing or certification for appraisers in order to be qualified to provide appraisals to federally-regulated lenders. Most common situations wherein an appraisal is needed require the services of a licensed appraiser. Each state determines the requirements to become a licensed real estate appraiser. These requirements generally include a combination of specific education, passing of a licensing exam, and a substantial amount of appraisal work experience (generally gained while serving as an assistant to a licensed appraiser). In New York, appraiser licensing is governed by the Department of State Division of Licensing Services.
Insurance: Before you hire an appraiser, it is important to verify that the appraiser carries sufficient E & O (Errors and Omissions) Insurance. This is an insurance policy that protects both the appraiser and the client in the event that an erroneous appraisal results in monetary harm or other damages to a user of the appraisal.
Experience: Of course, experience is extremely valuable in most any field or profession. However, experience is even more important in the real estate appraisal profession. It is commonly known that a property’s location is its most prominent characteristic. Because no two cities, no two neighborhoods, and no two pieces of property are exactly alike, each location is unique and is affected by myriad factors and considerations, each of which has an effect on value. An experienced appraiser who has conducted many appraisals in a specific geographic region over an extended period gains invaluable insight into the dynamics and characteristics of the market. Thus, when selecting an appraiser for an assignment, it is vital to consider the appraisers degree of overall experience and particularly their expertise in the market area of the property to be appraised.
I need to hire an appraiser. I understand what it means for an appraiser to be licensed or certified by the state, but what about designations? Some appraisers have designations such as SRA or MAI. Who gives these designations, what do they mean, and should they matter to me?
In addition to basic licensing and certification administered by each state, many appraisers, seeking to further their knowledge and skills and to demonstrate their high degree of professionalism in the appraisal field, work towards and achieve specific designations administered by industry organizations. In the US, the Appraisal Institute gives the designations most commonly used by appraisers. According to the Institute, “Appraisal Institute designated members have met rigorous requirements relating to education, testing, experience and demonstration of knowledge, understanding and ability.” The most common designations are SRA and MAI. The SRA is a professional membership designation indicating a high level of skill and experience in the analysis and valuation of residential properties. The MAI is held by appraisers with the highest levels of experience and skill in the analysis and valuation of a wide variety of real estate property types including commercial, industrial, and residential properties. In addition, the MAI is qualified to advise clients on real estate investment decisions. (To relate to a more commonly-known designation, the MAI is the rough equivalent of the CPA in the accounting profession.) To earn a designation, an appraiser must meet rigorous requirements including specific education, testing, and experience requirements. The designation is your assurance that the appraiser you are dealing with is a dedicated professional who is well-qualified to provide real estate valuation and consultation services.
The real estate taxes I am being charged for my property are exceedingly high. Is there any way for me to get my property taxes lowered? Do I need the services of an appraiser to help achieve this?
With many areas throughout the country experiencing record levels of real estate property value increases during the past decade, many homeowners and other real property owners have seen their real estate taxes go through the roof. The processes through which municipalities assess and tax real estate is rather complex and involves many factors. While most municipalities make reasonable efforts to tax properties in a fair and uniform manner, tax assessments are far from an exact science and many properties are assessed at higher values than they should be, causing the property owner to pay more in taxes than appropriate. (Of course, plenty of properties are assessed too low, but we have yet to see any property owners complain about having that predicament.) In many such cases, a qualified appraiser (often working with a real estate attorney or other legal professional) can analyze the property assessments in question and show – based on various factors including the tax assessments of similar properties in the area – that in fact the real estate taxes should be lower. The results of this assessment appraisal can then be utilized as part of a legal proceeding to have the property taxes lowered. The resulting assessment changes may result in substantially lower real estate taxes for the property owner, saving thousands, tens of thousands, or even more money over the course of ownership.
I’m in the middle of a divorce and my spouse and I jointly own real estate. Should I hire an appraiser to protect my interests?
Absolutely. In many divorce cases, a home and/or other real estate forms the bulk of the couple’s assets. When an estate must be split or other arrangements are required, it is vital to know just what the assets in question are worth. If a property is under- or over-valued, it may result in an unnecessary loss for a party to the divorce. A qualified real estate appraiser can give an accurate valuation of your property and ensure that property assets involved in the divorce proceedings are properly assigned value.
My property is located in an area that makes it suitable for a particular use, but the current zoning does not allow for that use. I suspect that I could sell my property for a higher price if only it would be eligible for that use category. Is there any way to get around this limitation? Can an appraiser be helpful in this process?
Each municipality has a strict set of zoning laws that specify exactly what may and what may not be built on any particular lot within the area. Often, neighborhoods change over time, and a property that was reasonably zoned for one use years ago may in fact be more suitable for a different use due to changes in the area. For example, an expanding high-demand shopping district may see demand rise to the point where residential properties bordering on the commercial zone would be more logically put to commercial use. In such situations, depending on the particular laws and regulations of your municipality, it may be possible to effect a change in zoning, or at least a variance allowing for a non-conforming use. A qualified appraiser can be an invaluable resource in making the case for such use changes. An appraiser can demonstrate, using reliable and accepted analysis techniques, that a particular property’s value would be positively impacted if a currently non-legal use were made legal. It may also be shown that the particular characteristics of the neighborhood dictate that a particular use is more logical than the currently allowed uses. These points can be very useful ingredients in making the case for a zoning change or variance.
I’m facing foreclosure and/or bankruptcy and I want to be sure that I attain fair market values for my real estate holdings. Do I require the services of an appraiser?
Foreclosure and bankruptcy can be very stressful and unpleasant experiences. The last thing you need when facing such situations is to get shortchanged on the value of your property. A real estate appraiser can provide an accepted, professional opinion of value in the form of an appraisal and thereby help ensure that you get the full worth for your holdings.
The local municipal government or utility company is taking land from me or obtaining an easement within my property. How can I be sure that I receive proper compensation? Can an appraiser help?
In cases of eminent domain requisition or utility easements, property owners are generally not given much choice in the matter; the only question is how much they will be compensated for their loss. Naturally, the municipality or utility company will want to minimize the amount compensated. Obtaining the services of a knowledgable appraiser will be part of your best strategy to ensure that your interests are protected and that you get compensated properly for the property loss or encroachment you are facing.