Different Appraisal Types
By: D. Scott Murphy, SRA
One of the most common questions I am asked when I speak to groups or teach a class is – what is the difference in a refinance appraisal and a purchase appraisal? Or, do you appraise a property differently for an individual that you would for a bank? Or clients will call and request an appraisal be done like we would for a refinance or a purchase.
The bottom line is that most appraisals are more alike than you might think. With only a few exceptions, the vast majority of appraisals are to estimate market value of the subject property as of the day the appraiser inspects the property. That is, what would the property sell for on that date?
The definition of market value is “the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
1) Buyer and seller are typically motivated;
2) Both parties are well-informed or well-advised, and acting in what they consider their own best interests;
3) A reasonable time is allowed for exposure in the open market;
4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” (FIRREA – SOURCE: The provisions of this Part 323 appear at 55 Fed. Reg. 33888, August 20, 1990, effective September 19, 1990, except as otherwise noted)
Unless the appraiser is asked for another type of value, every appraisal should be based on this common definition. Examples of other types of value are retrospective – the client wants to know the value of the property as of a previous date, this is common in tax appeal work where the value would be January 1st of a given year. Quick sale or liquidation value – the client wants to know what the property would be worth if the marketing time were to be reduced. Another valuation which often gets confused is the value of a property for relocation purposes.
In a standard relocation appraisal, the appraiser completes an ERC appraisal report which does not ask the appraiser to arrive at a market value as of the date of inspection but an anticipated net sales price so many days in the future ( typically 90 or 120 days. ) There are a number of other specialty valuations which are done based on the agreed scope of the appraisal but these are not common and certainly are not done for typical mortgage appraisal purposes..
The other question that comes up is why are refinance appraisals always higher than other types of appraisals? I can understand why this is a common misconception because there may have been some truth to it in the past. I hate to say it but we saw many appraisers, pressured by lenders and homeowners, tend to stretch the value when completing a refinance appraisal. This caused many people to be upside down with regards to the relationship between their mortgage balance and true market value.
The fact of the matter is that regardless of whether an appraisal is done for a divorce, a refinance, a purchase, pre-listing, or any other matter where the objective is to arrive at the current market value – the outcome or resulting value should be the same. It does not matter if it is a desktop appraisal, a drive-by appraisal, a full appraisal completed on a standard form, or a full-blown narrative report, the resulting value should be the same.
Appraisers are licensed and bound by the rules of the state for which the property is located. They are also governed by a set of national standards called USPAP ( Uniform Standards of Professional Practice. ) There are certain instances when the appraiser can deviate from the USPAP rules but for simplicity the point is all appraisers must follow the same rules and standards. This applies to how the property is measured to how the comparables are located. It applies to which approaches to value are to be used and when certain approaches can be eliminated.
As a very generalized statement, the appraiser goes through the exact same process with every single appraisal assignment and should arrive at the same value regardless of the intended use of the appraisal. The difference is in the appraisal assignment type. If it is a drive-by the fee might be lower because the appraiser does not inspect the interior of the property and does not have to measure the property. That time savings translates to a lower fee.
However, the appraiser still researches the comparables the same way, makes the same adjustments and arrives at the same value. He has to make certain assumptions about condition, quality and amenities and relies on public data for physical information such as square footage and room count. The client is aware that a drive-by might be less reliable than a full appraisal and the appraiser outlines any assumptions he has made in his report.
If you were to have a pre-listing appraisal done one day, a refinance appraisal done the next day and a purchase appraisal done the following day – all should arrive at a similar value. The reason I did not say “the same value”, is that an appraisal is an estimate of market value. Appraising is not a perfect science. There is an element of art was well as the fact that the market is not perfect. Homes do not sell for a specified price or X% of the list price. However, these three appraisals should be within a reasonable range – which is generally thought to be 5-8%+/- of each other.
So while there are a variety of uses for an appraisal and there are a variety of forms and formats the appraisals are presented in, for the most part, the appraiser is striving to report the true market value of the subject property as of the date of the inspection. I am sure I have said this in previous articles, but appraisers need to remember that they do not determine market value they interpret market value. I see more variance in appraised values on the same property due to appraisers who do not understand this fact and who do not accurately research the market, the type of appraisal, or the purpose of the appraisal.
NormHatke 