Home Appraisal 101 - What is Inside Your Appraisal?

You paid $300 or $400 for one when you bought you house and $300 or $400 again if you refinanced (and hasn't everyone?) but I'll bet you have never seen your home appraisal. You paid for it, you own it, you have a right to a copy of your home appraisal, but in one of those strange wrinkles in the mortgage process, to get a copy, a homeowner usually must request it from the mortgage company - in writing. And how often do you think that happens?

Most homeowners really don't care about the appraisal. As long as the conclusion was the house was worth enough to justify the mortgage, homeowners are happy and, by the time the ink is dry on the closing documents, have forgotten they were ever required to spend the money.

Still, an appraisal is interesting and, in the future, might help you track your home appreciation in light of other sales in your neighborhood. Make the effort, you can probably request a copy by email, read it, then save it for future reference.

Appraisals are often confused with two other types of less formal home evaluations, CMAs and BPOs. When an owner prepares to sell a home he usually requests a Comparative Market Analysis (CMA) from one or more real estate agents. Agents look at comparable homes in the neighborhood that are on the market or have recently sold and use these "comps" to come up with a suggested listing price. There are no rules for CMAs and every agent has his own approach. Some are verbal, straight out of the agent's mental data bank; others are quite elaborate, with information on a number of properties, pictures and detailed descriptions based on the agent's actual inspection of the properties while they were on the market. A CMA is a background to or justification of a suggested price and is, in no way, an appraisal. Sometimes an agent will even "cherry pick" comps to back up his predetermined listing price.

A BPO or broker's price opinion is commissioned by a bank (often because of a pending foreclosure) or an attorney handling a divorce or an estate. In contentious situations the agent may be unable to access the interior of the house and must rely on a drive-by and information on comparable home sales from the public record. In presenting both CMAs and BPOs, agents are using their experience and instinct rather than any formal training in valuing property.

Appraisers, on the other hand, are formally trained and either licensed or certified by their state. Most will certify that they prepared their work in conformity with the requirements of the Code of Professional Appraisal Practice of the Appraisal Institute.

Appraisers determine the value of a single family home using two different processes: a replacement cost method and a comparison method. The value of a multi-family property is further determined through an income approach. The first two methods will be discussed in detail in part two of Appraisal 101.

An appraisal is a dense multi-paged, document; usually on a form acceptable to Freddie Mac or Fannie Mae (their endorsement(s) are on the bottom of the page.) In order to simplify our discussion of appraisal contents, we will use a real appraisal of a home located in a coastal area of a southeastern state. This appraisal is 13 legal size pages, but the last five pages are boilerplate in which the appraiser certifies his methods, and outlines the limiting conditions of the appraisal (in traditional cover the posterior language.) Only the first two pages of an appraisal contain really relevant information although subsequent pages have pictures and maps that augment the text.

The first section of the appraisal identifies the "Subject" both actually and legally: street address, lot or plot, section, subdivision, type (Fee Simple, condo, PUD), and other identifying information such as census tract, and map reference. The appraiser also gives the most recent property tax amount and any special assessments levied by the town or the county. If a purchase rather than a refinance is involved, there are also a few details of the pending sale.

Section two describes the neighborhood, its boundaries, and general amenities and does the same for the municipality or county. This is a free-style description and the appraiser may note local economic factors such as major employers, describe the climate, or local attractions such as beaches, state parks, or recreation opportunities. Appraisers probably recycle this prose every time they produce a report in a given area.

Section four contains a description of the site - lot size, topography, shape, landscaping, availability of utilities and amenities such as street lights, paved streets, sidewalks, whether the property is located in a flood zone, and any apparent easements. An appraiser should not be expected to examine the title for easements - he is only reporting on apparent ones such as indicated by light poles or telephone equipment on the property, nor should an appraisal be relied on for flood zone status.

Next are home improvements - that is the house itself. The subject house in our example is described as a 1 unit, 1 story, detached single-family ranch, 38 years old with an effective age of (i.e. has been maintained so as to appear) 20 years old. The house has a slab foundation, brick and vinyl exterior, a composite shingle roof, no basement. The appraiser noted no dampness, unusual settlement, or pest infestation. The form is set up so as to list the rooms and the total square footage on each level of a house - basement, level 1, and level 2, etc. Since this is a one story home, the appraiser noted a living and dining room, three bedrooms, two baths, and a kitchen, a total of 1845 sq. ft on level 1. Porches, patios, garages, or any outbuildings are not relevant to this section.

The appraiser is expected to note such interior features as floor coverings, walls (sheetrock, paneling, plaster), bathroom walls and floors (vinyl, ceramic tile), doors (solid or hollow core?), heating and air conditioning (existence and fuel source), kitchen appliances, insulation, existence of and access to an attic, car storage (attached, detached, garage, carport?) and amenities such as fences, porches, swimming pool, deck, and fireplaces, and to evaluate their appearance or condition. The words "average" and "typical" are appraisers' best friends. Do not expect anything creative or lyrical here.

At this point, our appraiser has already made four mistakes; there is no town sewer in the neighborhood, the building is nearly 200 square feet larger than noted, has an entry hall (how did he miss it?) and the home's flooring, described as vinyl and carpet, is actually hardwood and paver brick. Apart from the existence of a town sewer, these errors probably had no impact on the final value, but it does cast some doubt on the process.

In the final section of Page 1, the appraiser describes "additional features" (a "24 sq. ft front porch (which does not exist - maybe this is the missing foyer?); a 17 sq. ft patio, 332 sq. ft. enclosed porch, irrigation system, and ceiling fans") notes the condition of the improvements ("average for its age with no repairs noted"): and any adverse environmental conditions such as hazardous waste ("None.")

The background work done and the parameters laid out, the appraiser next uses some complex formulas to determine the value of the property. We will explain this process in detail later this week.