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An appraisal is an opinion or estimate on the value of real property. This value is generally expressed as Market Value. Obtaining an appraisal is an important part of the mortgage process that will determine the actual market value of the home being purchased or refinanced. The appraisal allows the lender to determine if the value of the home is sufficient to support the loan amount requested. The appraised value will also ensure that a homebuyer is not paying more than a home is actually worth.
Appraisal requirements include:
- Interior and exterior inspection of the subject property
- A street map that shows the location of the subject property and of all comparable properties that the appraiser used
- An exterior building sketch of the improvements that indicates the dimensions
- Clear, descriptive photographs of the subject property and comparable sales used
The appraisal report (URAR) is broken up into sections. Some of the more common sections include:
- Subject: Basic information such as the address, legal description, owner’s and/or borrower’s names. The client is also identified here.
- Contract: Information on the contract for sale is entered here for appraisals in which a change of ownership is about to occur.
- Neighborhood: Detailed information related to the neighborhood such as boundaries, characteristics, trends, description and conditions.
- Site: Data on the size, shape, zoning and access to utilities as well as FEMA flood-zone information.
- Improvements: Physical characteristics of the property such as age, materials, and condition.
- Sales comparison approach: This is where the property being appraised is compared to recent sales of other properties.
There are three ways to approach an appraisal. These are all used to determine the final, “reconciled” value.
Sales Comparison Approach
The purpose of the sales comparison approach is to derive a value based on recent sales prices of similar properties, called comparables. The method assumes that the typical buyer pays no more for a property than the cost of purchasing an identical property.
Data is collected on recent sales of comparables. Because comparables may not be identical to the home that is the subject of there appraisal, some price adjustment is necessary. To minimize the amount of adjustment required, comparables should be closely similar to the subject in size, age, proximity and condition.
The purpose of the cost approach is to indicate value based on the cost to replace the property, using current materials and methods. It is not necessary to simulate production of an exact replica. Any depreciation on the subject property is estimated and subtracted from the new reproduction cost. Depreciation includes physical wear, needed repair and replacement of components, outmoded design and materials, and incompatibility with surroundings.
This approach assumes the property is purchased for its productivity as an investment. The appraiser will look at market level rents and operating expense ratios to determine the value. This approach can be used for investment properties as well as owner-occupied properties.