Appraising the appraisal

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Due to the volatile real estate market, with values increasing years ago and now either stagnant or declining, now more than ever, accurate and reliable real estate appraisals are needed — whether you’re thinking of buying and selling a home, or whether your client needs to place a fair value on the marital home for divorce purposes.

What follows is a brief description about how to tell if an appraiser is qualified, as well as how to read and understand his or her work product.

Credentials are Critical

It is important to know something about the appraiser, as to qualifications, education and experience.

In 1989 the Financial Institution Reform and Recovery Enforcement Act was passed, which required states to license/certify real estate appraisers. Most states are mandatory, but Wisconsin is a voluntary state — which means that anyone can be an appraiser, but only licensed and certified appraisers can do work for financially-insured institutions.

The Appraisal Subcommittee (www.asc.gov) oversees the states and keeps the National Registry of Appraisers. This registry, available at the above mentioned Web site, indicates if an appraiser is licensed or certified, current with his or her continuing education, and appraisal qualifications board-qualified (AQB).

“Licensed Appraisers” are basically trainees, since they may have the basic training completed, but do not have the experience required to be a certified residential appraiser. The “Certified Residential Appraiser” has met all educational requirements and experience to complete all residential and small commercial appraisals. “Certified General Appraisers” are qualified to do all types of property, residential and commercial appraisals.

Deciphering the Forms

Most appraisals done for family law cases are single-family residential houses.

In 2005, the Federal National Mortgage Association (FNMA, or “Fannie Mae”) updated its appraisal forms, which are the standard in the industry. This form is for mortgage purposes, but since the purpose of the appraisal is to give an opinion of the current fair market value as of a certain date, it also has become the standard in the court system. There are several different definitions of “Market Value,” but all are basically the same.

The basic two-page, single-family form has the first page describing the neighborhood, site and improvements, with the second using that data to compare the subject to comparable sales for valuation purposes. Many times the description on the first page does not match up with the Sales Comparison Approach, and leads to an inconsistent appraisal.

The neighborhood section of the appraisal report lends itself to boilerplate descriptions, which do not adequately describe the area. Many times in the Neighborhood Description section, an appraiser uses generic terms, which could be used for properties located in downtown areas or suburban areas.

Look for complete descriptions as to parks in the area, main arterial streets, schools, commercial developments, downtown or shopping areas, etc. Remember the three most important things in real estate: “Location, location, location.” A complete neighborhood description is essential.

This is also the basis for external obsolescence, which is loss in value due from entities outside the property lines such as location next to an auto service station, high-tension power lines, etc.

The site section is also very important. The appraiser should have the site dimensions, not just the area. The dimensions, along with the complete zoning regulations, are needed, to determine if the site is a legal or legal non-conforming use. Also, the FEMA flood map information is critical.

The improvement section will contain the information about the house. Most of this information is factual, such as the age, size, design and different components of the house.

The only estimate made in this section is the condition. If the appraiser does not mention any updating, remodeling or rehabbing of the subject, and states the condition is “good,” there might be a problem.

This section should also state any problems with the house, such as paint needed inside or out, older windows, poor floor plans, etc. This section would additionally state any functional obsolescence, which is loss in value due to a poor floor plan, inadequate bathroom facilities, lack of onsite parking, etc.

Are Comparables really Comparable?

The sales comparison approach, which is on the second page of the basic appraisal form, is the basis for obtaining a fair market value of the subject. The data on the first page is put into the grid under the subject heading.

It is now important for the appraiser to select the best comparables available. The subject property should look like the comparables used, and that is why comparable photographs, along with the subject photographs, are mandatory in an adequate comparison. A ranch should be compared to ranches, a bungalow to bungalows, etc. If I see a ranch style subject and the comparable is a colonial style house, there had better be a good description as to why that property was used.

Also, it should be adjusted appropriately. The data submitted in the grid for comparison are all factual data except for condition and functional utility. One of the most common mistakes an appraiser makes is to pick comparables that have had some updating or remodeling and stating it is in “average” condition, while the subject has not been updated and stated to be in “average” condition.

The dollar adjustments used should be based on “paired sales analysis” and should make common sense. In a perfect appraisal, there should not be any adjustments, but that rarely happens. The lower amount of adjustments, chances are the appraisal is more accurate.

Conclusion

The most important part of reviewing an appraisal is to know if the appraiser is fully qualified and familiar with the subject neighborhood. Common sense in reviewing an appraisal is essential, because the appraisal should stand by itself. The appraiser is only and advocate for his or her appraisal — not to anybody else.

Paul “Rick” Vozar is a past chairman of the Wisconsin Real Estate Appraisers Board, and is president of Vozar Appraisal Service Inc. in West Allis. He can be reached at [email protected].