The Appraisal Process: “Reconciliation” (3 of 3)

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: Image by Damon Duncan via Flickr

Now that the inspections are complete, it’s time to analyze the data. The inspection has given the Appraiser a first person point of view of the Subject property from which to evaluate the comparables and other data with the data obtained from the research in the due diligence.

As mentioned in the earlier posts, the MLS and GIS systems were utilized to gather market and tax data for the Subject property and the comps (Due Diligence). The Appraiser now looks at this data and evaluates it compared to the the data obtained in the field work (The Inspection). At times the due diligence data needs additional review or clarification. This is where the Appraiser would research additional sources of information – documents or others involved which may have contributed to the data. Once the Appraiser is satisfied that the information is credible, the report writing process can begin.

Everything we discussed in the Due Diligence and The Inspection posts essentially is the Appraiser’s determination of the Scope of Work necessary for a credible appraisal report:

SCOPE OF WORK: The scope of work for this appraisal is defined by the complexity of this appraisal assignment and the reporting requirements of this appraisal report form, including the following definition of market value, statement of assumptions and limiting conditions, and certifications. The appraiser must, at a minimum: (1) perform a complete visual inspection of the interior and exterior areas of the subject property, (2) inspect the neighborhood, (3) inspect each of the comparable sales from at least the street, (4) research, verify, and analyze data from reliable public and/or private sources, and (5) report his or her analysis, opinions, and conclusions in this appraisal report.

The report we are doing for the purposes of these posts is the Fannie Mae 1004. To begin, after the analysis is completed, the Appraiser enters the information requested in the form Uniform Residential Appraisal Report (URAR). The first page is for Subject specific data…details of the property, contract information (if applicable), neighborhood information, site information and descriptions of the improvements). A sketch is made of the Subject illustrating a floorplan which is incorporated into the form and is carried over into the finished area above grade and any basement area. Other pages included in the report are a location map (showing the Subject and all comparables); pictures of the subject, sold comparables and listing comparables; three pages of explanations, certifications and signature(s) – URAR pages 4,5, and 6. [clicking on the URAR link above will bring you to a Wikipedia page which has a link for the 1004 form]. Essentially the report encompasses the three approached to value below:

Sales Comparison Approach: The sales comparison analysis is depicted on page 2 of the URAR. Here the analysis compares the sold comparables to the Subject property and the adjustments for the various line items are made. Additionally, the summary of the sales comparison approach is given. Lastly, the reconciliation of the data and indicated value by the sales approach is provided. The active/pending listings are compared on a separate addenda as the sold comparables.

Cost Approach: This approach is not required by Fannie Mae, however many Lenders require it regardless. This approach (page 3 of the URAR) is essentially a breakdown of costs and depreciation for the Subject. It factors an opinion of land value, replacement costs of the building and amenities if rebuilt new and aged life depreciation. It is meant to be a double check to see if the sales approach and the cost approach are relatively close – thereby giving credibility.

Income Approach: This approach is generally reserved for investment properties where rental income is involved. It is seldom used in residential appraisals for owner occupied properties. (also on page 3 of the URAR)

We hope this series has helped in understanding the Appraiser’s duties and the Appraisal Process. If you have any questions or if you want clarifications about the process, please contact us.

If you would like to see the earlier posts in this series, please click for part 1: Due Diligence or for part 2 The Inspection.

Thank you for your interest. Please look for more informative topics and series to come.