What is An Appraisal?
An “Appraisal” is a “neutral, third party opinion of value.” What this really means is that you an appraiser like me to provide you with my opinion of what your property would sell for in the open market. Simple? Sometimes it is, sometimes not so much!
What are the rules?
The federal government says that anytime you get a home loan that is backed by the Federal Government you need to have a licensed and certified appraiser provide an appraisal, and this appraisal must meet the rules and guidelines of the “Uniform Standards of Professional Appraisal Practice” or USPAP for short.
This set of rules state some rather obvious items such as: the appraiser must be competent to do the appraisal; the appraiser can’t lie or mislead; the appraiser can’t be self serving; the appraise must use the same methods to value the home that are used by local consumers; and so on. Other rules and regulations come into play on other types of transactions that don’t involve banks, such as when the government takes private lands for public use, or a parcel of land is conserved for non-development.
The Importance of USPAP
It is not widely known to the public, but there are many non-government-regulated appraisals that do not require the use of a licensed appraiser. For example some estate, legal, probate and taxation appraisals do not require the use of a licensed appraiser. However, as time goes by consumers of appraisal reports are demanding the use of licensed and certified appraisers, even if the government does not.
When a licensed appraiser certifies that they will perform the appraisal within the rules set by USPAP, they agree to and meet any regulation that is required to perform that particular appraisal, and agree to be competent and qualified to perform the appraisal.
Why would anyone hire a non-licensed, non-certified appraiser? Appraisal licensing and regulation came about in the late 1980’s after the savings and loan crash. Prior to that, no specific appraisal regulation or licensing existed. When the Federal government instituted appraisal regulation and licensing, these requirements extended only to transactions regulated by the Feds. In the early years of appraisal regulations, many appraisers and non-bank consumers did not see the value of hiring only licensed and certified appraisers. The cycle of financial crisis over the years has highlighted the need for sensible oversight and this desire for acceptable work standards has extended well into the private marketplace.
Reasons for an Appraisal
Home Buying, Refinance and Improvement
If you buy, sell or refinance any real estate then an appraisal by a licensed was likely performed. By the numbers homes make up the largest number of appraisals each year, followed by commercial and land properties. If you remodel your home, you’ll likely take out a construction loan or line of credit and the lender will require an appraisal
Estates and Probate
When someone in your family dies, the real estate left behind is subject to wills, trusts and probate proceedings. More often than not the courts and mediators require that the real estate be appraised as of the date of passing. Often these appraisals are performed by licensed certified appraisers, but curiously enough the Federal Government does not require these appraisers to be license. Local custom and regulation however may require licensing.
Portfolio, Investment and Taxation
Investors require the valuation of holdings on a regular basis, often on 5 or 10 year cycles. This is to keep current values properly represented in the corporate ledgers for tax and investor disclosure. When all or part of a portfolio is sold, an appraisal is often performed to reset current value of the asset in the companies books.
When a government or quasi government agency takes some of all of a piece of private property, Federal and State law require that the owner be paid “just compensation” for the loss of the land. This compensation is normally based on the market value of the property as if it was being sold in a normal open market sale. Normally several appraisals are performed both for the government and for the land owner, and these appraisals are used to negotiate fair settlements for the taking of the land.
Similarly, when a government or quasi government agency purchased real estate using public funds, Federal and State law normally requires the purchase price be set by the value given in one or more appraisals of the property.
(photo credit steve loos photography)