What is an appraisal?
“The act or process of developing an opinion of value.”
The Dictionary of Real Estate Appraisal, Sixth Edition
Generally an “Appraisal” implies that the value opinion is reliable because it was determined through the appraisal process by a competent “Appraiser”. It is a valuation product that is more accurate and reliable because it was developed by an Appraiser.
Be wary of value opinions shared by untrained individuals not legally licensed or trained to give opinions of value. Some common examples of unlicensed individuals or entities who often call their product an “appraisal” include: real estate sales agents, property tax assessors, portfolio managers, & online valuation models (ie: zillow type websites).
Does Rikrland Valuation Services accept Cryptocurrency?
Yes. The short answer is yes, you may be able to use cryptocurrency like bitcoin or another currency to pay for services and products from our company. There are some stipulations, and due to exchange fluctuations the exact amount may change as a job progresses. For more information, you should contact our office. RVS does not sell or trade cyrptocurrency, nor do any of our employees engage in any illegal transactions. Cryptocurrency is a new and exciting concept, full of risk. We generally encourage our customers to utilize USD for payment of services.
What does Fair Market Value mean?
Often a potential client will call our office asking for a “Market Value Appraisal”. Sometimes they will use the term, “Fair Market Value” or FMV. In some settings the two terms are interchangeable but in the Appraisal field they can mean different things. It is important in all appraisals that the definition of market value be specifically stated, as differing users and uses have different definitions of what fair market value and market value mean. In condemnation, litigation, income and property tax uses the definition is generally set by the office of the federal comptroller, or internal revenue service (IRS). In mortgage financing often another definition is used. Uniform Standards of Professional Appraisal Practice (USPAP) defines market value as the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale where the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by some other undue stimulus.
What can that mean to our clients? Well, it is important that a competent and experienced professional evaluate each sale used in the development of a market value. Factors which can cause a transaction to fail the arms-length litmus test include:
- A common mind directing the negotiations and representing both parties in a transaction.
- Dual Agency situations where a single real estate brokerage represents both the buyer and the seller, even if two different sales agents working for the same broker are involved
- Common parties acting in an associated interest.
- Related parties are a good example of this.
- Control, (De Facto)
- One party has all the power to influence or force the other party to accept certain terms.
- State Land Sales or auctions where pricing is set at a certain point which can only go up.
- Favorable financing which is unable to be separated from the purchase price.
- Unreasonably motivated buyer or seller (liquidation sale or landlord/tenant sale)
Each of those situations above fail to meet the requirements of a fair market transaction, and as such if used in the development of a fair market value…will negate the concluded value determination. For this reason most institutions will not recognize a valuation not reached by a properly licensed Appraiser. In some states like Alaska it is against the law/statutes for a party other than a properly licensed Real Estate Appraiser to give any valuation that is called an Appraisal.
My bank/lender has assigned me an Appraiser, do I get a choice?
Generally when an Appraisal Report is being used for mortgage financing or any other type of lending where real property is being used for collateral, the financial institution will require that the Appraiser work for them. This means the bank or lender is the Client. It also means that even though you are often paying for the cost of the Appraiser, you do not own the Appraisal Report. You do have some rights under the Fair Lending Act, such as being furnished with a copy of the report in some cases (typically only in mortgage lending transactions). While this does not mean you can choose your own appraiser, it also does not mean that you can not have a some input on who the Appraiser (or more accurately the appraisal firm) is.
Property owners and buyers can relay their desire to exclude a company or particular Appraiser as long as they give a valid reason. A previous experience where the Value Opinion was not favorable is not a valid reason. A violation of law or statute, or a lack of qualifications is a valid reason. An Appraiser must be an independent party to the transaction.
Lenders prefer to use Appraisers and appraisal companies that have already waded through their vetting process. Generally lenders are wary of an Appraiser whom the borrower or seller has chosen because of a potential conflict of interest. If you approach a lender demanding a certain Appraiser, it can be an indicator that the Appraiser may have a bias.
You can relay a preference for adherence to a set of requirements that you wish the appraisal firm be able to demonstrate. Good preferences include:
- Geographic competency in your property location
- Errors and omissions insurance
- Specific experience in your type of property or intended use
- A certain level of education or licensing
- A good example is to require an MAI or SRA designation
Residential and commercial transactions have different requirements and rules. It is important to educate yourself on the particular set of requirements and rules which apply to your lending situation in your area.
When hiring an appraiser, what types of questions should I ask? My lender has assigned me an appraiser, which types of questions are appropriate to ask?
The following questions would be appropriate:
- What is your license type in Alaska?
- Some lending institutions will use licensed Appraisers from other states operating on a one-time or limited permit to Appraise in Alaska. (There are different education and license levels for Appraisers in Alaska)
- For which Appraisal Company or Firm do you work?
- Does this company have an Alaskan business license to Appraise Real Estate at my location? (Alaska Statutes require that the appropriate business licenses be shown if requested)
- If the firm is an appraisal clearinghouse or appraisal management company (AMC), ensure the AMC is licensed by the State of Alaska to solicit appraisals in Alaska. Alaska DOES require AMC licensing!
- What professional designations do you have and from what Appraisal organizations?
- How long have you been appraising in Alaska?
- Do you have a current Errors & Omissions insurance policy that covers this job?
- How many appraisals similar to mine have you completed in my area?
- Have you ever appraised this (my) property before?
- Have you every had an administrative action or complaint levied against you?
What are the types of appraisals?
Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value, for real property. With that definition in mind, what are the different types of appraisals?
There are numerous different types of appraisal products. Some of the more common appraisal products produced by Real Estate Appraisers include:
- Restricted Appraisal Report:
- A written appraisal report restricted in users and use to a sole entity. The appraisal process utilized is still the full process as determined by the Appraiser. It still includes all approaches to value and all of the required components of an appraisal report as required by USPAP. An example of a restricted appraisal report would involve an owner who engages an Appraiser directly for an asset valuation of their own property in order to determine if they want to sell or refinance the property. The end product, the restricted appraisal report will not be used by any other parties (ie: a bank or a sales agent) for any other uses. So the appraisal product is held in confidence for the owner’s own use. Because of the limited users and uses of the report, these reports can often be developed and offered for a reduced fee. Restricted appraisal reports should not be confused with reduced scope appraisal reports.
- Self-Contained Appraisal Report
- The self-contained appraisal report is no longer recognized by the industry however it is often referenced and ordered by the lenders. Generally what lenders are asking for when ordering a self-contained appraisal report is a fully comprehensive, “kitchen sink” report. It implies that all possible analysis should be conducted and much if not all of the supporting data for the conclusions should be included within the narrative appraisal report.
- Summary Appraisal Report
- When the self-contained appraisal report became no longer recognized by the appraisal industry, the summary appraisal report was also eliminated. The most commonly requested valuation in commercial lending however, is still the summary appraisal report. Often lenders will order a “summary appraisal report as previously outlined in USPAP prior to 2014”. In other words…they’re asking for a report that was eliminated from the industry 5-6 years ago! It can be difficult to get the lending industry to modernize! At Rikrland Valuation Services when a lender requests a summary appraisal report we understand that they are asking for a slightly reduced amount of information to be presented in the final written product. That is very appropriate as it allows the Appraiser to cut some of the report writing time down without compromising the analysis conducted.
- Narrative Appraisal Report
- The narrative appraisal report is simply a format. It means that the product will be presented in a narrative (or story) form created specifically for the subject property. This differs from a form appraisal report greatly, see “Form Appraisal Report” below. narrative appraisals can be utilized in every type of appraisal however, they are most commonly used in commercial real property lending and business valuations. Some mortgage clearing houses and less ethical lenders will not accept a narrative format because they cannot data-mine (sell your information and the Appraiser’s data) the report to steal the information other purposes.
- Form Appraisal Report
- Most common in the residential (single family and multi-family homes up to 4-units) industry is the form appraisal report. If you have ever financed your residence through a mortgage company, you’ve probably seen one of these types of reports. The most common form used today is the Fannie Mae/Freddie Mac form 1004. It is an update from the 2055, though that form is still requested occasionally. Residential lenders prefer to utilize these forms because they are required for underwriting and backing by the government. Most residential lenders will sell your mortgage after you close on it. There is a whole market of mortgage buyers who trade in these loans as a commodity. Due to this, a standardized format is used to make this process more automated and easy. Lately with the advent of the Appraisal Management Company (AMC) and other Appraisal Clearinghouse type companies, the sale of your information and property statistics allows the company another revenue source. Online websites that give automated values for properties purchase this data to create their algorithm of value. This is called an Automated Valuation Model (AVM), and many lenders are using this cheaper, less accurate product to make lending decisions instead of Appraisals conducted by licensed Appraisers. Consumers and property buyers can protect themselves by ensuring that only a properly licensed Appraiser is used in the value determination process.
- Abbreviated Scope Appraisal Report
- The scope of work can often be reduced by utilizing assumptions or hypothetical conditions. The amount of analysis conducted by the Appraiser can then be reduced, often significantly. This type of report can often be offered for a significant price reduction which can make it a very useful tool in some applications. Anytime reductions to the scope of work conducted in the appraisal process are requested, you should carefully ensure that the components omitted do not present a compromise to the integrity of the end product. Some abbreviated scope requests are not possible ethically. A good example of a non-ethical abbreviated scope appraisal is the often requested “drive-by” appraisal or “desktop” appraisal some lenders order in Alaska. There are very few situations in Alaska where a desktop or drive-by appraisal product are ethical and legal. You should consult with your Appraiser to ensure that an abbreviated scope appraisal report or drive-by appraisal is ethical, legal, and appropriate. If ever in doubt, call Rikrland Valuation Services for a consultation, or call your lawyer.
- Date of Death Appraisal
- One of the more sensitive appraisal products we often get asked about is referred to as the “Date of Death” Appraisal. When someone dies and their estate needs to be valued for settlement with the IRS or another entity, an Appraisal Report that meets IRS standards becomes a necessity. Other names include: Estate Appraisal, Retrospective Appraisal or Probate Appraisal. Often the client needing this type of Appraisal is navigating a difficult time in their life. We have experience in this type of Appraisal and can help ease the stress. This type of Appraisal generally includes a retrospective value that is a determination of what a property was worth on a previous date. It is important that the Appraiser has a sufficient database of historical information and local experience in order to properly look backwards in time to pinpoint the correct Fair Market Value to IRS definitions.
There are still other types of Appraisals, relaying your complete valuation needs to your Appraiser can help them in identifying the best product for your application.
What other products or services can an Appraiser provide that might be relevant or important besides an Appraisal?
- Market Studies
- Supply & demand analysis
- Tax Assessment review and advice (also appeals)
- Eminent domain and condemnation advice and appeal
- Estate planning and estate settlements
- Dispute resolution
- Estate settlements
- Property partition suits
- Zoning issues
- Lending decision contesting
- Undue influence brokerage disputes
- Expert witness testimony & advice
- Feasibility studies
- Cost/benefit (SWOT) and investment analysis
- Financial return modeling
- Subdivision analysis
- Land utilization studies
- Highest & Best Use analysis and study
- Business valuation
- Blue sky or intangible value determination