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  • Writer's pictureJesse Ledbetter

How to read an appraisal: Part 9

Today we wrap up the series on how to read the URAR 1004 form used in most real estate transactions.

Having spent page 1 defining the subject property in detail, the top of page 2 selecting comparable sales and analyzing them, and the middle of page three considering the Cost and Income Approach, the appraiser now comes to the "final" step. In truth, I've left out a great deal of the other things performed to get to this step for the sake of length and boredom, but this has covered the highlights.

Summary of approaches to value - The appraiser will summarize the findings of each approach to value (or why they excluded an approach, ie. a 300-year-old home's value will likely have very little information from the cost approach). This should include how they went about it, and why they believe it to be a good/poor indicator of value.

Approaches to value indications - Each approach will render a figure. In the Income and Cost approach, these are simple mathematical formulas based on prior research. However, the Sales Comparison Approach usually renders a range of indicated values. Sometimes this range is very small, and other times it is wider. Typically, the more complex/atypical the subject is, the wider this range is likely to be. The appraiser has a judgment to make - will they stay on the lower, upper, middle part of the range. If two properties adjusted closely, will they place the value on that point? This task takes into consideration the entire process all over again and is too complex to detail here, but suffice it to say, it should be explained why the appraiser chose the final number.

Reconciling three values - now that the appraiser has the Sale / Cost / Income "number," these two must be reconciled, and an explanation of why given. In most cases, the sale comparison approach is preferred, however, in a time where cost to build is going up (or down) the cost approach might be preferred. In an area where income-producing properties are prevalent, this might be the strongest indicator. Again, the appraiser must select the best tool, and explain why.

"As-is / Subject to" - I often see contracts that say "This is an as-is offer" but also make the offer contingent on financing. This might be a contradictory statement in the legal contract. If the home can't secure financing in its "As-is" condition, then your offer isn't actually "As-is." This is important to understand for buyers and sellers. The appraiser must write the report based on the needs of the financing being secured. FHA/USDA/VA have strict standards that the property must meet to secure financing. Conventional loans backed by Fannie Mae have standards as well. Just because you want the house "as-is" doesn't mean that the bank wants the house "as-is" if you default. Since the bank has the money, the bank gets what they want first.

"Effective Date" - Every appraisal is written as of an effective date. Only market data from that day or before can be used. If the perfect sale happens the day after, while it might inform us as to recent market developments, it can't go in the report as a sale. Likewise, if the market tanks the next day, that is not the subject of the report - the report reflects the facts as of the date of the report. An appraisal is a snapshot of a property at a single moment in time.

After this nine-part series, we hope that you feel more confident on how to read an appraisal and understand what you're looking at. The appraisal is designed to understandable by the intended user (the bank) but is in most cases accessible to the average real estate participant. Some arcane writing, and math that looks a little odd at first can be difficult to read, but with these tools, we're confident that you can read and learn from an appraisal that is in front of you.

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