Archive for June, 2009
Things That Appraise in the Night
This story is completely true. It was related to me by the man who lived it, and was first hinted at in the blog “What Exactly Are You Doing, Appraiser?”
Back in March of 2009, a real estate appraiser named Jason received a normal appraisal request. A two-family house, owner unoccupied, get to it when you have a chance. Simple. Jason arranged to pay a visit on a Thursday.
A certified appraiser for a number of years, Jason saw nothing out of the ordinary when he pulled up to the saltbox-style house. It was located on a side street in Danvers, Massachusetts, which history buffs will recall was once a part of the original Salem Village. But nothing unusual about the house. Just a house.
There was a lockbox on the front door. No one had lived there for a while, so this was standard practice. He keyed the code for the lockbox, got the key, and let himself in.
The first thing that struck him was that every single light in the house was on. Sometimes owner unoccupied houses are kept on timers so that it looks like someone is home at night, but Jason was there in the middle of the day. It didn’t make sense.
He stepped in and took out his digital camera to take some photos of the property. The first floor was laid out like a very wide hallway, one room leading straight into the next. At the end, opposite from where he entered, was a doorway that led to an enclosed porch. The stairs to the second floor were just outside the doorway.
There were a few pieces of furniture left behind by the most recent owners, and one of them was a recliner to the far left of the doorway. Jason paid it little notice.
After he finished with the first floor, he passed through the doorway and out onto the porch. He climbed the stairs to the second floor. The layout was identical to the first floor. Jason made his way through, snapping photos and making notes in his notebook.
As he passed the archway between the dining room and the living room, something suddenly pushed him hard from behind, right between his shoulder blades. He whipped around fast and caught movement out of the corner of his eye. His immediate thought was that a cat had been perched somewhere, pounced on him, and then took off. But there was nowhere for a cat to perch, nowhere for a cat to hide. He couldn’t find anything that could have pushed him. He was all alone in the house.
Jason sped through the rest of the second floor. He was supposed to check the attic, but he thought the attic could wait. He was ready to go.
He went back down the stairs in the enclosed porch, headed for the doorway that led back to the first floor. At the foot of the stairs he froze. The recliner he’d seen earlier was now blocking the doorway.
After taking a minute or so to process this, he shoved the recliner aside, sprinted through the house, ran through the front door, and slammed it behind him.
Real estate appraisers can see some strange things, but sometimes they see some really strange things. Buyer beware.
Insurable Value
For any business, it is important to carry various forms of insurance for things like property and equipment. Although an insurance company will establish its own value in order to determine the amount of coverage that is necessary to obtain on their assets, it is also important the business owner knows the insurable value of his/her assets, including buildings and equipment. This type of valuation can be used by businesses and their insurance providers in order to determine the proper amount of insurance to be carried.
For these purposes, an appraiser can determine the proper amount of insurance to be carried to assist in recovery in the event of loss and establish a basis for preparing the required proof of loss in the event of a catastrophe.
Understanding the insurable value of a business can also be helpful for a company that is looking to borrow money to document insurable value because it can give a lender additional peace of mind regarding a loan.
By: Present Value
Employee Stock Ownership Plan (ESOP)
An Employee Stock Ownership Plan (ESOP) is an employee benefit plan that gives employees ownership of shares in the company for which they work. When an employee leaves the company, the company must buy the shares back at their full market value. To determine the market value of the stock, companies that offer ESOPs must have an annual valuation.
A company may set up an ESOP as a way to reward employees – shares are typically given to an employee rather than purchased by an employee. Companies may also hope that by making employees owners, they will show a stronger work ethic and greater dedication to their jobs. Research has shown that an employee who has a stake in his or her employing company has a more positive attitude toward that company, which in turn, affects the company’s bottom line.
Conducting a valuation is one of the first things a company considering an ESOP should do before implementing the plan. If it turns out that the value is higher than expected, the amount the company would have to pay to departing employees may be too high to afford. To determine the company’s value, an appraiser will consider the company’s cash flow, profits, goodwill, and the value of the company’s assets. Other factors that will be taken into consideration are market conditions and comparable company values.
By: Present Value
What Exactly Are You Doing, Appraiser?
We’ve delved into quite a few topics with regard to real estate appraisal on this blog, so it’s remarkable we’ve never touched on one specific subject – what does a real estate appraiser actually do?
Now the obvious answer is that he or she appraises real estate. But what’s the process? What criteria do they use? Do they count mudrooms as part of the total living space? And what’s the pencil and sketch pad for?
Well, first things first. A real estate appraiser is given a specific property to appraise. The appraiser goes to the property and inspects the site. What condition is the exterior in? How much of a yard is in front and in back? How close is the property to the adjoining property? How far back from the curb is it? It goes without saying that the appraiser takes copious notes.
Once the initial exterior inspection is done, the appraiser takes pictures of the property from various angles. Then the interior inspection begins. Sometimes the appraisal is in an owner-occupied property, sometimes not. Sometimes the appraiser is followed from room to room by an anxious seller pointing out improvements they’ve made, and sometimes they’re pounced on by overexcited pets. An appraiser I know told me of an encounter he had with a ghost. You never know.
But hazards aside, the appraiser inspects each room carefully and makes a sketch of the property’s basic design. Some appraisers take a lot of measurements and add them to the sketch. They also inspect the attic and basement, if the property has either. And if necessary, they’ll take photos of the interior as well.
An inspection can be a quick process or can take several hours, depending on the size and attributes of the property. Once the appraisal is finished, the appraiser writes up a report about the inspection, comes up with a value, and submits it.
And that’s why that unfamiliar man or woman is walking around your house and taking notes about the wainscoting.
By: Present Value
The Appraisal Foundation Announces 2010-2011 Edition of USPAP
On June 9, 2009, The Appraisal Foundation, a congressionally authorized nonprofit organization that fosters professionalism among appraisers by setting qualifications and standards, announced that its Appraisal Standards Board (ASB) adopted revisions for the 2010-2011 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP are the generally accepted performance and ethical standards for the appraisal profession in the United States. Standards are included for real estate, personal property, business, and mass appraisal.
The new edition is expected to be available in October. However, ASB has issued a Summary of Action that will enable appraisers to become familiar with the changes that are part of the 2010-2011 edition. The changes will take effect on January 1, 2010.
The majority of revisions were made to the ETHICS RULE, the COMPETENCY RULE and STANDARD 3: Appraisal Review, Development and Reporting.
Two of the most significant changes are as follows:
- “A requirement was added to the Conduct section of the ETHICS RULE, stating that, prior to accepting an assignment (and if discovered at any time during the assignment), an appraiser must disclose to the client and in the report certification any services regarding the subject property performed by the appraiser within the prior three years, as an appraiser or in any other capacity.”
- “The appraiser’s obligation to allow a client access to his or her workfile when providing a Restricted Use Appraisal Report was removed.”
Present Value is a certified appraisal company and provides USPAP-compliant appraisal reports.
By: Present Value
The Appraiser’s Role
The Boston Globe published an article this week on the way the housing slump is affecting the job of an appraiser. When conducting a real estate appraisal, one of the tools an appraiser uses to determine a home’s value is sale prices of comparable homes in the area. But the large number of foreclosed properties is skewing that number, making it difficult for appraisers to make a proper judgment on a home’s value. Another issue is the current dearth of home sales, which gives appraisers little information with which to make comparisons. When there are no comparable home sales in the area, appraisers have to look at the sales of bank-owned properties, which can also drag down a home’s value. Another way appraisers determine the value of a home is to predict its value next year and balance that with its current value, but the current volatile market makes predictions difficult.
The trend seems to be that a buyer and seller will agree upon a price, but the appraisal value comes back lower than the agreed-upon price, threatening a successful sale. Real estate appraising is less of an exact science in the current economic climate than it used to be and much is left to interpretation. This is why it is more important than ever to work with an experienced appraisal company that you trust.
Click here to read the full article.
By: Present Value
AVMs
In real estate appraisal parlance, the acronym AVM stands for Automated Valuation Model. An AVM is a computer-generated report that uses complex mathematical equations to determine the most logical value of a home based on public records and other relevant data. There is no involvement of an appraiser or person during the compilation of the AVM. The report takes into consideration past market trends, factual neighborhood analysis, tax assessments, and other factors; each appraisal company uses its own set of calculations to achieve the final report.
AVMs have three principal limitations:
1. They are dependent upon the timeliness, accuracy, and comprehensiveness of the data they use.
2. AVMs cannot be used to determine the physical condition of a property.
3. AVMs can never fully replace the knowledge and judgment of a skilled appraiser.
Consequently, AVMs tend to work best in circumstances when there is a relative abundance of current data, when properties in a given area are similar overall, and when the condition and marketability of the property are typical for the area. AVMs are not as useful when data is lacking, in areas with diverse properties, and for properties that differ from the average property condition or marketability.
Though AVMs have many strengths, they cannot nor should they ever replace an experienced real estate appraisal company. An AVM is a useful tool, but only an appraiser can take into account the subtle nuances of any given property. Sorry, HAL.
By: Present Value
Common Types of Appraisal Reports
There various types of real estate and equipment appraisals that an appraiser can conduct on behalf of a client. It is important to know the nuances of each type of appraisal so that you know what you are getting at the outset. Here are some examples of common types of appraisals.
- Full appraisal or self-contained appraisal – A full appraisal is comprehensive, and often used for real estate appraisals. It draws on data from numerous sources to achieve the most accurate appraisal. An appraiser will inspect the interior and exterior of the property and pull data from various sources, including MLS, assessor, and tax records. Additionally, an appraiser will compare the property with recent sales of similar homes in the same area or neighborhood.
- Summary appraisal – A summary appraisal report, while used for real estate, often is used for estimating the value of machinery and equipment. These reports include on-site inspection details and assess single values of each tangible asset in addition to an aggregate value.
- Drive-by appraisal – A drive-by appraisal – although it doesn’t sound very appealing – is conducted on the perimeter of the property or when an appraiser drives by a property, but he does not enter and inspect the property.
- Desktop appraisal – A desktop appraisal, also as its name implies, is generally conducted by an appraiser sitting at a desk, who examines photographs and other supporting documentation. In this case the appraiser does not visit the site of the property being appraised.
- Automated valuation appraisal – An automated valuation appraisal is conducted using data from sales of property in the local area. An appraiser will use software that is designed to determine patterns of value and generate a value of the property or value range.
By: Present Value
Real Estate Owned (REO) Property
A real estate owned (REO) property is one that is owned by a mortgage lender – typically a bank. Banks aren’t in the business of owning homes, nor do they want to be, so a property only becomes an REO property after all other options are exhausted.
As soon as a lender determines that a borrower or home owner is in financial distress – missed mortgage payments are the best indicator – the lender will try to discover how much equity a property has by ordering an appraisal from a certified appraisal company. Based on the amount of equity determined by the appraisal, the lender will then attempt to sell the property either through a foreclosure auction or a short sale. But if neither of these selling methods works, the property becomes classified as REO.
After the property is repossessed and classified as REO, the lender will immediately begin trying to sell it. It will remove any liens on the property and either attempt another auction, or ask a realtor to sell it to another potential homeowner on its behalf. Often, REO classified properties have been poorly maintained and may need repairs, but the low sale prices banks offer in order to get the property off their hands make up for the repair costs a home buyer will have to assume.
By: Present Value
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