Owning a home is part of the American dream, and it is often good for the buyer, and good for local, state, and national government. Home ownership can give people a reason to be more involved in the community, and to assist in shaping their identity. Home buying is the single largest financial investment most people make, and most buyer’s want to protect their investment. This desire to protect their investment with proper maintenance and care is good for the neighborhood and draws the homeowner into community engagement, compared to renters, who are often short term residents with comparatively little desire for neighborhood improvement.
The purchase of a new home supports the construction industry, and adds to the tax base of local government, either thru direct property tax, or by increased sales tax as local residents buy goods and services from nearby business. These nearby businesses are usually required to pay a sales tax on transactions, which increases revenue to local government. In this way, a robust market for real estate contributes significantly to the local, state, and national interests. Real estate appraisals by a home appraiser can help determine equity positions in real estate.
Home or residential real estate appraisers are hired to provide an opinion of value about residential property. Appraisers do not create or establish value - only buyers establish actual market value as evidenced by their purchases. Appraisers simply try to understand how buyers would look at a subject property, and estimate a value based on evidence from these buyers. Real estate appraisal is the art and science of estimating market value, and real estate appraisers are the professionals that estimate real property values.
Automated Valuation Models (AVM’s) are computerized algorithms written to process property data to concluded various statistical data, including property value. These AVM’s offer quality control and analysis, audits, refinance value and other information. These technologies compete with traditional appraisals, resulting in fewer appraisal assignments. However these technologies are criticized for offering lenders an opportunity to select the highest value estimate from the various AVM’s. With high value estimates, lender’s can offer larger mortgages with the justification that the property has the collateral needed to pay back the loan if they have to foreclose. This is the same mentality that contributed to the S&L melt down of the 1980's, and the subprime mortgage crisis of 2007-2008, which drove the Great Recession that followed.
Appraisers use three traditional valuation approaches to determine value, (cost, sales and income). To determine value, the appraiser must select comparables with similar economic characteristics. The comparable propertiers should appeal to the same buyer’s that would consider the purchase of the subject property. It should be in the same market area and ideally has sold recently.
The cost approach is based on the reasoning that a buyer would not pay more for a property than it would cost to purchase land and build improvements of similar quality and condition. For an appraiser to develop a cost approach, they need to consider:
• Land value of a site.
• Direct and indirect costs of the improvements. Direct costs are money to be spent for materials and labor. Indirect costs include management costs, architectural and engineering fees, permits, financing costs, insurance, sales and lease-up costs, etc.
• Entrepreneurial Incentive. This means that nobody works for free. If you are a developer, and you are going to put the work into a new build, you are going to want to be paid for your effort.
• Depreciation. There are three major categories of depreciation which are physical, functional and external. Physical depreciation focuses on the age of the building. A new build is probably in better physical condition than a property that is 50 years old. Functional depreciation deals improvements that are outdated compared to modern builds. Perhaps the A/C system is inadequate, or the property has a pool that is no longer adding value to the property. External depreciation are factors outside of the property boundary, (the property is near a landfill and nobody will buy it).
• Reconcile the above into a single value estimate.
The sales approach is the most reliable and direct value approach for most real property, (if there have been sales). The sales approach is simple, uses market data, is applicable in most situations, and is widely understood by the general public.
• Use sales, listings and pending offers from properties that are similar to the subject.
• Find relevant units of comparison for analysis, ($/SF, $/unit, $/acre, $/bedroom, etc)
• Compare the comparables to the subject in terms of the various elements identified above, and adjust the sales price of the comparables to reflect how they differ from the subject.
• Reconcile the above into a single value estimate.
The income approach to the valuation of residential property is applicable when there is an active rental market, and when the typical buyer would consider rental income in their decision to purchase. It is based on the assumption that property value is related to the properties ability to produce income. The most common technique for valuing a single residential property from the income approach is to use a multiplier on the income, (usually a Gross Rent Multiplier or GRM).
• Determine the GRM from recent sales of similar rental property. Divide the sales price by the monthly, (or yearly) rental income, which determines the GRM.
• Estimate the monthly or yearly income of the subject property by doing an investigation of typical rents for similar properties.
• Multiply the GRM by the monthly, (or yearly) rent to obtain an indication of market value.
• Reconcile the above into a single value estimate.
With the three approaches outlined above, the next step is final reconciliation. If more than one approach was used to value the subject, then the values must be reconciled to arrive at a final opinion of value. In essence, you choose which approach gives the best answer for value, given the current subject market.
The actual appraisal report, if provided by a licensed appraiser, is impacted greatly by the regulatory overlords at The Appraisal Foundation, (TAF). TAF requires particular standards of facts, descriptions, and scope of work, in addition to the type and definition of value, intended use of the report, intended users of the report, and other demands. To comply with these reporting requirements, TAF along with its sister organization the Appraisal Standards Board, has written Uniform Standards of Professional Appraisal Practice, (USPAP). USPAP is a document originally copyrighted in 1987 and is said to provide quality control to the appraisal industry. However every two years changes are made to USPAP, which effectively moves the goal posts with every new edition. Every two years TAF regulators require that all licensed appraisers buy the new USPAP document and attend a mandatory class the appraiser must pay for. Each appraiser is then required to sit through a presentation by a certified instructor who will explain in excruciating detail TAF’s latest thought on how to do an appraisal. Amazingly, non of TAF’s 14 employees are appraisers, or have ever completed an actual appraisal assignment. After 30 years of USPAP, there is no evidence that TAF regulations have improved the appraisal industry. On the contrary, appraisers are leaving the industry in mass, and few new appraisers are willing to endure the appraisal licensing process, a process that is regulated by TAF’s sister organization, the Appraiser Qualifications Board.
In 1986 the Federal national Mortgage Association, (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac), developed the Uniform Residential Appraisal Report (URAR). A revised URAR form was released in 1993, and again in 2005. The report is designed to report on one unit residential properties, and is commonly know as URAR From 1004.
For manufactured homes, most residential appraisers will use the 1004C. The 1073 form is for individual condominiums, and the 2055 is for exterior only inspections of residential property.
Most states did not require appraiser's to have an appraisal license until the late 1980's. For many years, appraisal organizations provided training and certification to trainees that joined their group and took their training education. Organizations like the American Institute of Real Estate Appraisers, or the Society of Real Estate Appraisers, or the American Society of Appraisers, all provided education and certification programs. (The AIREA and the Society merged into the Appraisal Institute in 1991).
Although this system of appraiser training worked well for decades, deregulation during the Reagan administration allowed Savings and Loan’s and other lenders to lend on commercial properties instead of their traditional market of residential properties. Savings and Loans were experts at residential lending, and because of that, they had comparatively few bad residential loans.
That changed with deregulation, which allowed S&L’s to lend on commercial properties. S&L’s had little experience with commercial lending, and lending on commercial properties is much different than lending on residential real estate. Commercial loans are often for bigger dollar amounts than the traditional home loans that the S&L’s usually funded, so when their lending on commercial properties went bad, many S&L’s quickly went out of business. More importantly, these S&L’s had loan losses threatened the Federal Savings and Loan Insurance Corporation, (FSLIC), which was hurt so badly that it became insolvent. The FSLIC was eventually rolled into a new insurer called the Savings Association Insurance Fund (SAIF), and millions of taxpayer dollars were used to save the S&L’s from complete collapse. At the time, this was the biggest bailout ever using taxpayer funds, and was estimated at $300 billion over 30 years.
In 1989, in response to the Savings and Loan Crises, (which again, was caused by deregulation), Congress passed the Financial Institutions Reform and Enforcement Act (FIRREA). FIRREA changed everything for the real estate appraisal industry by developing a series of laws and “guidance” that impacts every facet of the typical appraiser’s work day. In essence, the deregulation of the S&L’s has led to burdensome regulation of appraiser’s - regulation that is slowly strangling the appraisal industry. It is ironic that deregulation of financial institutions during the Reagan administration has led to very tight and restrictive regulations on appraisers, which had comparatively little involvement with the original meltdown. It would make sense that if you want to impose regulations to insure fewer bank failures in the future, you should regulate the banks, not appraisers. Appraisers did not underwrite bad loans - bank staff did.
FIRREA laws established The Appraisal Foundation, (TAF). In addition to TAF, FIRREA required the establishment of the Appraiser Qualifications Board, (AQB) which established Appraiser Qualification Criteria, which in turn required all states to set up appraiser licensing and enforcement. Although each state can set up its own specific criteria for appraisal licencing, the specific minimum guidance given by AQB bureaucrats, and (TAF), falls along four major criteria:
FIRREA laws established The Trainee Appraiser -
• Must be a US citizen and find a supervisory appraiser will to train a novice.
• Must complete 75 hours of appraisal education from an accredited institution, (all education is typically at your expense) which must include a 15 hour Uniform Standards of Professional Appraisal Practice, (USPAP), with exams.
• As of 2018, most states require a background check, including a fingerprint clearance card.
• Must keep a log jointly maintained by the trainee and the supervisory appraiser. Typically there is a fee of several hundred dollars to apply for Trainee status in the state you are in.
• Must complete all of the criteria for the Trainee Appraiser.
• Complete an additional 75 hours of appraisal education, for a total of 150 hours, (with exams).
• Also, at a minimum, must have 1,000 hours of appraisal experience in a log jointly maintained by the trainee and the supervisory appraiser.
• Take and pass the state exam for Licensed Residential appraisers.
If you complete all of the above, you will be licensed to appraise “non-complex” 1-4 residential units having a transaction value of less than $1,000,000, or a “complex” residential unit of less than $250,000. However you can’t appraise FHA insured mortgage assignments unless you have a Certified Residential license or more.
• In additional to all of the criteria listed above, you must have a Bachelor’s Degree in any field of study, or an Associates Degree in either: Business Administration, Accounting, Finance, Economics or Real Estate. Or complete 30 semester hours of college in courses that include English, Macroeconomics, Finance, Algebra, Statistics, Computer Science, Business or Real Estate law, and some electives. Or 30 semester hours in a CLEP program, (College Level Examination Program).
• There is an additional 125 hours of appraisal education in very specific topic areas, including Highest and Best Use, Site Valuation and Cost Approach, Sales and income approach, report writing and case studies, statistics, advanced case studies, and other electives.
• Must have 1,500 hours of residential experience.
• Must take and pass the state exam for Certified Residential Appraisers.
As a Certified Residential appraiser, you can accept FHA insured assignments.
• In addition to all of the criteria listed above, you must find a Certified General Appraiser willing to train you in commercial valuation, which is vastly different than residential appraisal work.
• Must have 300 hours of qualifying education in total.
• Must have 1,500 hours of experience in commercial properties.
• Must take and pass the state exam for Certified General.
The Certified General appraisal license qualifies you to appraise all types of real property. That said, according to ethical guidelines, if there is a property type you have not been trained in with your supervisory appraiser, you can not accept the assignment unless you tell the customer that you have never appraised this property type, but that you will gain the knowledge to complete the appraisal, which may require asking another appraiser with experience to assist.
If you elect to be an appraiser, you should probably join an appraisal organization. There are many appraisal organizations that “sponsor” The Appraisal Foundation, (TAF) but there is only one organization that has been bold enough to speak truth to power and walk away from them - The Appraisal Institute. The rest of them have been told that they need to speak "with a unified voice" if representing TAF, which means they don't ever publically speak their independent thought outside of the collective group think of TAF. TAF has effectively neurtered the sponsoring appraisal organizations. They seem happy to only preserve their "seat at the table", while TAF and their 14 employees continually heep additional regulations and enforcement on appraisers. The sponsoring appraisal organizations of TAF offer at best, professionally supervised neglect of the appraisal profession.
If you elect to be an appraiser, you should probably join an appraisal organization. There are many appraisal organizations that “sponsor” The Appraisal Foundation, (TAF) but there is only one organization that has been bold enough to speak truth to power and walk away from them - The Appraisal Institute. The rest of them have been told that they need to speak "with a unified voice" if representing TAF, which means they don't ever publically speak their independent thought outside of the collective group think of TAF. TAF has effectively neurtered the sponsoring appraisal organizations. They seem happy to only preserve their "seat at the table", while TAF and their 14 employees continually heep additional regulations and enforcement on appraisers and let business flow to non-appraisers or AVM's. The sponsoring appraisal organizations of TAF offer at best, professionally supervised neglect of the appraisal profession.