Which home renovations add the most value?
What is an appraisal?
An appraisal is a thorough process leading to an opinion of value. This opinion is arrived at through a
formal process that typically uses the three ''common approaches to value''. They are the Cost Approach
- which is what it would cost to replace the improvements, less physical deterioration and other factors,
plus the land value. There is the Sales Comparison Approach - which involves making a comparison to other
similar, nearby properties which have recently sold. The Sales Comparison Approach is normally the most
accurate and best indicator of value for a residential property. The third approach is the Income
Approach, which is of most importance in appraising income producing properties - it involves estimating
what an investor would pay based on the income produced by the property.
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What does a residential real estate appraiser do?
An appraiser provides a professional, unbiased opinion of market value, to be used in making real
estate decisions. Appraisers present their formal analysis in appraisal reports.
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Why would a person need a home appraisal?
There are many reasons to obtain an appraisal with the most common reason being real estate
and mortgage transactions. Other reasons for ordering an appraisal include:
- To obtain a loan.
- To lower your tax burden.
- To establish the replacement cost of insurance.
- To contest high property taxes.
- To settle an estate.
- To provide a negotiating tool when purchasing real estate.
- To determine a reasonable price when selling real estate.
- To protect your rights in a condemnation case.
- To provide documentation for a government agency such as the IRS.
- To provide data for a lawsuit
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What is the difference between an appraisal
and a home inspection?
The appraiser is not a home inspector nor does he/she do a complete home inspection. A home inspection is a third-party
evaluation of the accessible structure and mechanical systems of a house, from the roof to the foundation.
The standard home inspector's report will include an evaluation of the condition of the home's heating
system, central air conditioning system (temperature permitting), interior plumbing and electrical
systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the
foundation, basement, and visible structure.
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What does the appraisal report contain?
Each report must reflect a credible opinion of value and must identify the following:
- The client and other intended users.
- The intended use of the report.
- The purpose of the assignment.
- The type of value reported and the definition of the value
reported.
- The effective date of the appraiser's opinions and conclusions.
- Relevant property characteristics, including location attributes, physical
attributes, legal attributes, economic attributes, the real property interest valued, and Non real estate
items included in the appraisal, such as personal property, including trade fixtures and intangible items.
- All known: easements, restrictions, encumbrances, leases, reservations, covenants,
contracts, declarations, special assessments, ordinances, and other items of a similar nature.
- Division of interest, such as fractional interest, physical
segment and partial holding.
- The scope of work used to complete the assignment.
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After completing the report, what assurance
is there that the value indicated is valid?
In communicating an appraisal report, each appraiser must ensure the
following:
- That the information analysis utilized in the appraisal was
appropriate.
- That significant errors of omission or commission were not
committed individually or collectively.
- That appraisal services were not rendered in a careless or
negligent manner.
- That a credible, supportable appraisal report was communicated.
Most states require that real estate appraisers are state licensed or certified. The state licensed or certified
appraiser is trained to render an unbiased opinion based upon extensive education and experience
requirements. To become licensed or certified, appraisers must fulfill rigorous education and
experience requirements. In addition, appraisers must abide by a strict industry code of ethics
and comply with national standards of practice for real estate appraisal. The rules for developing
an appraisal and reporting its results are insured by enforcement of the Uniform Standards of Professional
Appraisal Practice (USPAP).
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How are appraisers certified?
Regulations regarding licensing and certification of Real Estate
Appraisers vary from state to state. However, licensing and
certification is most often associated with many hours of
coursework, tests and practical experience. Once an appraiser is
licensed, he or she is required to take continuing education courses
in order to keep the license current.
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Who do appraisers work for?
Typically, appraisers are employed by lenders to provide an opinion of value of residential
real estate involved in a loan transaction. Appraisers also provide opinions in litigation cases,
tax matters and investment decisions.
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Where does an appraiser get the information used to determine their opinion of market value?
Gathering data is one of the primary roles of an appraiser. Data can be divided into Specific and General.
Specific data is gathered from the home itself. Location, condition, amenities, size and other specific
data are gathered by the appraiser during an inspection.
General data is gathered from a number of sources. Local Multiple Listing Services provide data on
recently sold homes and active/under contract homes that might be used as comparables. Tax records
and other public documents verify actual sales prices in a market. Flood zone data is gathered from
FEMA data outlets. And most importantly, the appraiser gathers general data from his or her past
experience in creating appraisals for other properties in the same market.
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Why do I need a professional appraisal?
Anytime the value of your home or other residential real estate property is being used to make a significant
financial decision, an appraisal helps. If you're selling your home, an appraisal helps you set the most
appropriate value. If you're buying, it makes sure you don't overpay. If you're engaged in an estate
settlement or divorce, it ensures that property is divided fairly. A home is often the single, largest
financial asset anybody owns. Knowing its true value means you can the right financial decisions.
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What exactly is PMI and how can I get rid of it?
PMI stands for Private Mortgage Insurance. It insures a lender against loss on homes purchased with a
down-payment of less than 20%. Once equity in the home reaches 20% you can eliminate the PMI and start
saving immediately. The lender would require an appraisal to determine the current market value of the
home.
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How do I get ready for the appraiser?
The first step in most appraisals is the home inspection. During this process, the appraiser will come
to your home and measure it, determine the layout of the rooms inside, confirm all aspects of the home's
general condition, and take several photos of your house for inclusion in the report. The best thing you
can do to help is make sure the appraiser has easy access to the exterior and all of the interior of
the house.
The following Items, if available, will help your appraiser to provide a more accurate appraisal in a
shorter period of time:
- A location survey.
- A deed or title report showing the legal description.
- A recent tax bill.
- A copy of the original plans.
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What is "Market Value?"
Market value or fair market value is the most probable price that a property should bring (will sell for)
in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each
acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this
definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer
under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed
or well advised; (3) a reasonable time is allowed for exposure to the open market; (4) payment is made in
terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price
represents the normal consideration for the property sold unaffected by special or creative financing or
sales concessions granted by anyone associated with the sale.
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Who actually owns the appraisal report?
In most real estate transactions, the appraisal is ordered by the lender. While the home buyer pays for the report
as part of the closing costs, the lender retains the right to use the report or any information contained within.
The home buyer is entitled to a copy of the report - it's usually included with all of the other closing documents
- but is not entitled to use the report for any other purpose without permission from the lender.
The exception to this rule is when a home owner engages an appraiser directly. In these cases, the
appraiser may stipulate how the appraisal can be used; for PMI removal, or estate planning or tax
challenges, for example. If not stipulated otherwise, the home owner can use the appraisal for any
purpose.
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Which home renovations add the most value?
The answer to this is different depending upon the location of the home. Different markets value
amenities differently. Adding a central air conditioner in Houston, Texas may add significant value,
while putting one in a home located in Buffalo, New York might not have much impact.
As a rule, the most value returned from renovating kitchens and bathrooms. According to one national
survey, kitchen remodels returned an average of 88% of the investment. In other words, a $10,000 kitchen
remodeling project would add approximately $8,800 to the value of the home. Bathrooms were second,
returning 85%.
