How to read an appraisal: Part 1

This week we begin a multi-part guide on how to read the appraisal report that has landed in front of you, by going through the most commonly used form, the URAR 1004.

Above is the "Subject" and "Contract" sections of the first page of the 1004 Form. "Subject" is the term that refers to the property that is being valued.

"Subject"

Within the subject section of the report, the property is defined in the most specific terms available. Addresses can change (as anyone who lived through 911 modernization knows), but the "legal description" of the property at the county level is something that can be tracked back for hundreds of years to the vesting by the British Crown to the original colonists. Information concerning the property taxes, owner of public record vs borrower, are all important to the lender's decision-making process.

If the property has been marketed in the past year, this must be disclosed as well. Even if the home is not currently for sale or under contract this can be important information. If the home was listed for the past year for $400,000 without a successful sale, this would be a strong indicator that the home is likely not worth $400,000.

"Contract"

Whether the property is a "for sale by owner" or a conventional on market sale, if there is a contract, USPAP (the document that governs appraisers) requires that the appraiser attempt to review this document if possible. Again, this can serve as an important data point of an "up to the minute" market condition.

Within the contract their are many contingencies that will need to be taken into consideration to understand the mind of the buyer.

1. Did they offer $1,000,000 for a shack, but made it contingent on an appraisal? Then that's just a "market value" offer, and not a dollar more.

2. Did they offer market value on a home that is built over a sink hole, but make it contingent on a "home inspection?" Then that "offer" isn't worth the paper its written on.

3. Does the offer represent an informed buyer, who is typically motivated? Then its likely that their offer is "at market value."