The Appraisal Process: “Due Diligence” (1 of 3)

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DUE DILIGENCE

It must be noted that this series is an Appraiser’s perception of a methodology. The series will touch on the main areas of what an Appraiser does in a typical 1004 appraisal. It is not the intention to be all-inclusive of the actual work performed. It is simply an attempt to show individuals what is done in order for an appraisal to be completed and the hope that they have a better feel for what they are paying. It does not identify specifically what the purpose of the appraisal is… in other words we do not state what the opinion of value is for… just the process to get the opinion of value. Ahh, disclaimers!!

The first part of the series, “Due Diligence“, is essentially researching the Subject property to determine the physical attributes, get the owners’ take on the property and the amenities, gather data from the MLS for the Subject’s market area and look into what the County in which the property is situated considers the Subject to be.

Our first step when we receive an appraisal order is to contact the owner to set up an inspection date and time. The Appraiser must have access to the interior of the property in a 1004 appraisal. We ask the owner questions about the house, some of which are itemized below:

Type: SFR, Condo, Townhouse, et al.
Style: ranch, two story, et al and exterior (brick, siding, both, et al).
Location: subdivision, main street, golf course, et al and lot size.
Basement (finished or not) or crawl space or slab. If basement, access to interior and exterior.
Size of the heated living area in square feet (above grade) and room count.
Garage: attached, detached, number of cars.
Water/Sewer: public or private.
Other amenities such as decks, inground pools, fences, outbuildings, et al.
Improvements made within the past 3 years and approximate costs.

This information gives us a basis for the research to be performed. We usually ask one additional question … is the owner aware of any house(s) they feel are similar to theirs that have sold in the past 6 months, within a mile of theirs? We feel this is important as it gives us a better feel of what the owners perceive their house to be.

The next step is to look at the County GIS and tax records to gather information they have on the Subject property. The County GIS system is a source of pertinent information for real estate. This information is set aside for analysis.

Next, the MLS (Multiple Listing Service) is enlisted to gather additional information (it has a wealth of it). The information ranges from determining the sales activity for the Subject’s market area to tools which can be utilized for market analysis. The data available can be taken down to the street level and past history going back several years is available.

Some GIS systems and MLS systems have recently included an AVM (automated valuation model) module to their databases. While the accuracy of these databases are argued frequently, it does have a relative utility to the process. Although, we do not rely on them for the type of accuracy we demand for our reports, it does offer some pertinent information and is part of our due diligence. We consider them a general tool.

One of the uses of both the GIS and the MLS is the selection of comparable properties to the Subject. Comparables (aka comps) in the current requirements are both sold comps and active or pending listings. With the sold comps, the general guidelines are within 6 months and within 1 mile of the Subject. However recent market conditions have made Lenders more critical of these guidelines. The norm is getting to be within 3 months, however if none are available a detailed explanation is required. The active or pending listings are used to see current activity in the market and they usually are chosen with the understanding that the length of time of the listing be sufficient to have market exposure.

The Appraiser will gather several sold comparables and several listings. The reporting usually requires three sold comps and two listings, however more are included when the appraiser finds it to be more credible. In order to get the required number of comps, the Appraiser may have to go beyond the 1 mile guideline with explanation. The MLS is generally used as a qualified source, however the tax information taken from the County can be used. More work is usually done to confirm the interior information and any sales data that is needed. The properties chosen are usually printed out and used in the inspection.

In the second part of our series, we will explain what we do for the field work segment of the process. Please come back tomorrow for part 2 of the series…. “The Inspection“. If you would like to see the previous post – the introduction – click here