Frequently asked questions
Why do I need an appraisal?
That's a great question. Why do you need an appraisal? Are you trying to obtain financing on a property? Are you getting divorced? Did someone leave a property to you in their will? Are you trying to convince the tax assessor to lower your property taxes? These are some of the most common reasons why an appraisal is needed.
The truth is, if you are asking this question, you are likely needing an appraisal of a non-commercial residential property, a one to four unit residential property. The majority of investors and commercial property owners have to deal with appraisers much more frequently and are more familiar with the appraisal process. Their loan terms are shorter, they need to refinance more often, they need to make improvements or major repairs to their properties more often, or they want to leverage their investments into acquiring other properties.
As such, the majority of the following discussion is relative to residential property owners of one to four unit properties. Anything over four units is considered a commercial property and often requires substantially more complex analysis often utilziing multiple approaches to value (e.g. cost approach, sales comparison approach, income approach), and requires the appraiser to have the competency, experience, and appropriate license for appraising such properties.
Lenders nearly always require an appraisal before lending on a property. They need to know what kind of investment they are getting involved in. They may want to verify that a property under contract for sale is actually worth its sale price. They have different loan to value ratios on certain types of loans and loan amounts. The appraiser's opinion of value can have a major impact on lender decisions.
It's very common for loved ones to pass away and leave property to their children, siblings, or other loved ones. When this happens an Estate Tax Appraisal (sometimes referred to as the Date of Death Valuation) is needed. When someone passes, it is necessary to valuate their assets, including real estate. These types of appraisals are often ordered by an estate planning attorney and or accountants. The point of this appraisal is to determine whether a federal estate tax is due to the IRS and the amount. These types of appraisals often involve developing an opinion of value as of retrospective date as opposed to most lending appraisals, which typically require current effective date of value.
Let's face it, while the national divorce rate has come down, it's still around +/-36% per the CDC. Many of these marriages do not end amicably. Most often, a spouse has to leave the household. In the best of cases, an appraisal is ordered to determine the fair market value of a home so that one spouse can buy the other out. Sometimes the divorce does not go well, and the appraisal is needed for litigation purposes. These are oftten referred to as a Dissolution Valuation.
To anyone who's bought a property in the Bay Area in recent years, property tax due dates can be stressful to say the least. Sometimes after properties are substantially renovated, the county tax assessor may reassess the property at a rate that seems excessive. In either case, a property owner may feel the property taxes have been assessed too high. Often an appraisal is ordered to appeal the tax assessor to reconsider the reassessment.
It's not uncommon these days to see perfectly good homes be completely demolished to make way for a gargantuan luxury home, even in areas where luxury homes were never the intention. Developers or investors and/or their lenders may order an appraisal to determine the economic feasibility of the proposed development. More simply put, they want to know if all the money they're investing is going to turn them a profit and if the market will recognize the value of the improvements.
But you may think "I just bought the home a year ago, it hasn't changed any since then and market values have increased, can't my lender just give me the loan based on the last sale of my home?" or "I just had my home appraised six months ago, why do they need a new appraisal?". The answer could be as simple as your lender having strict requirements on lending practices. Remember, you are asking to borrow money; if you were lending a large sum of money, wouldn't you want to make aboslutely sure there is a good chance you will recoup your money?
Also, while you think properties values may have generally gone up in your neighborhood, this may not necessarily be the case for your specific market segment. The lender also has no idea if its borrower has taken adequate care of the home. Poor maintenance levels can have a major impact on the condition of a home over the course of a year. You may have completed substantial remodeling to the home and mentioned this to the lender, in which case, the lender may want to see how those improvements may have impacted the value or marketability of the home, if at all.
A common question or comment our staff frequently hears when meeting homeowners is "Why can't they just use Zillow? It shows how much our house is worth." The basic fact of the matter is that Zillow estimates are based on general data and it utilizes algorithms. It may be somewhat accurate in large housing tracts where there are several simliar sales of similar floorplan homes on similar lots. However, in real estate there's a common saying, "every property is unique." This is especially true in the majority of the Bay Area. Zillow may be most useful in showing shifts in general property values. However, it can't differentiate why two nearly identical properties sold for a value difference of say $1,000,000.
For example, we appraised two nearly identical homes in Hillsborough, both built by the same developer at the same time, both similar in design and with similar quality finishes. One sold for $5 million and the other appraised at the same time for refinance purposes for $3.75 million. In fact, part of the reason the lower value property owner refinanced, was because he noticed his neighbor's home sold for $5 million, and he was under the impression his was worth the same; he wanted to take the opportunity to complete a cash out refinance on his perceived increase in equity. The owner of the lower valued home could not understand how his value came in so much lower, when Zillow says he and his neighbor's home have a similar value and he knows his neighbors home just sold for $5 million. The answer was not so simple to the borrower, but it was rather simple to the appraiser. Both homes were situated on 1/2 acre lots. However, the higher value home that just sold had full lot utility. In other words, they could fully improve and utilize the entire half acre of the site. The lower value home had only 50% lot utility due to the hillside topography, this was verified with the county assessor. Essentially, they really only had use of half of their 1/2 acre lot. The rest was not suitable for improvement as it was steeply sloped and a large portion was covered in foliage and trees. Zillow's algorithm or aggregated sales data would not have been and was not able to make that observation and judgement. Rather, it compared the property to other similar properties regardless of lot utility. In this case, the appraiser's experience, knowledge of the nuances of the market area, and observation of the site utility difference was crucial. In the hillier areas of Hillsbrough, usable and level site area commands a premium.
For those who enjoy reading and would like a very detailed explanation into the need for an appraisal and the appraisal process, the Appraisal Institute provides a comprehensive article, which can be read and/or downloaded in PDF format using the following link.
There are many articles that go into further detail about real estate appraisers and the appraisal process. Below is a link to an article that discusses the need for appraisals and other issues. However, note that they do not necessarily reflect the opinions and views of Detailed Analysis.
What does an appraiser do?
What does an appraisal look like?
There are many forms and formats in which an appraisal report is produced. The two most common are the FannieMae 1004 and the Fannie Mae 2055. Both forms are rather similar; however, the latter will typically have less information as it will be based solely on an exterior inspection. For condominiums, there are the FannieMae 1073 and Fannie Mae 1075 forms.
Who owns the appraisal?
The short answer is "the client." However, if you're not familiar with appraisal terms and regulations, you may be thinking, "the appraisal was performed on my property and I paid for the appraisal, so aren't I the client."
What qualifies as gross living area (GLA)?
Some form of this question comes up often among clients and borrowers, most often from those who receive a copy of their appraisal from their lender. It will either be presented as a question or a statement. Either way, what is being asked is, "what qualifies as gross living area?" Here's the short answer....
Why don't you have a formal office?
There are several reasons why we chose to "go remote". Here are the short answers:
Our industry dynamics changed dramatically after May 1, 2009, when the Home Valuation Code of Conduct (HVCC) was implemented during the 2007-2009 housing crisis. Prior to the HVCC, appraisers, loan officers, and mortgage brokers forged strong relationships and worked together very closely. The HVCC pretty much ended the manner in which appraisers are engaged. In 2009, the days of mortgage brokers and other lender representatives coming into to meet the appraiser(s) ended. These days, communication between lenders and appraisers for residential orders is handled by appraisal management companies (AMC's), commercial orders through assignment portals (e.g. RIM's), phone calls, and emails.
Since 1985, Detailed Analysis has had various offices. We founded our company in Burlingame and we were located on Burlingame Avenue. We've had two offices in Foster City, and one satellite office in Walnut Creek. Recently, our Foster City offices on Pilgrim Drive were demolished to make way for the Pilgrim-Triton Housing Development.
Over the past decade, there have been so many innovations in the appraisal industry. Lenders and appraisers have become much more environmentally conscientious, which lead to a major reduction in the need for hardcopy paper appraisal reports as everything pretty much went digital. Sales data, rental data, market reports, zoning, and permit data are so much more accessible via the internet. Data and files can be digitized, if not already, and stored in the cloud or on drives, thereby eliminating the need for large file storage and copy rooms. Storage and communication platforms such as Dropbox, Google Drive, Box, Google Meets, Zoom, and Skype, allow our staff to effectively communicate and access data from anywhere. This makes for more efficient collaboration, happier appraisers, and a more productive staff.
We are glad we have chosen to "go remote" or as some say "work from home". Like many progessive thinking companies in the Bay Area, we recognized that the traditional idea of "the office" was antiquated, especially in our industry, which is based on project deadlines. In some larger appraisal firms, where there may be a higher number of trainee (unlicensed or non-certified) appraisers, working closely with senior appraisers is key. However, our staff is comprised solely of certified residential and commercial appraisers. We feel especially lucky that we embraced this remote workforce dynamic when we did, especially during these difficult times, as the Bay Area and the world copes with COVID-19 (Coronavirus).
How can I verify an appraiser's credentials or that they are in fact certified?
You can verify the validity of our licenses using the following link to the Bureau of Real Estate Appraisers. There is a free online service that instantaneously verifies the license history of the appraisers.
Will the IRS accept an appraisal report in which only an exterior (drive-by) inspection was completed by the appraiser?
IRS – Generally Accepted Appraisal Standards
The IRS adheres to the same appraisal standards and regulations mandated by the Uniform Standards and Principles of Appraisal Practice. The Uniform Standards of Professional Appraisal Practice (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States. USPAP was adopted by Congress in 1989, and contains standards for all types of appraisal services, including real estate, personal property, business and mass appraisal. Compliance is required for state-licensed and state-certified appraisers involved in federally related real estate transactions. Internal Revenue Bulletin: 2018-33 states the following:
III. Requirements for Qualified Appraisals and Qualified Appraisers
B. Definition of generally accepted appraisal standards
Section 170(f)(11)(E)(i)(II) provides that the term qualified appraisal means an appraisal that is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. Generally accepted appraisal standards are defined in the proposed regulations at § 1.170A–17(a)(2) as the “substance and principles of the Uniform Standards of Professional Appraisal Practice [USPAP], as developed by the Appraisal Standards Board of the Appraisal Foundation.” Several commenters recommended that the final regulations require appraisal documents to be prepared “in accordance with USPAP” and not merely in accordance with the “substance and principles of USPAP.” Other commenters indicated that strict compliance with USPAP would eliminate use of all other appraisal standards, including some that are generally accepted in the appraisal industry. The Treasury Department and the IRS agree that it is beneficial to provide some flexibility by requiring conformity with appraisal standards that are consistent with the substance and principles of USPAP rather than requiring that all appraisals be prepared strictly in accordance with USPAP. Accordingly, the final regulations do not adopt the recommendation to require strict compliance with USPAP and retain the requirement of consistency with the substance and principles of USPAP.
Essentially, if an appraisal meets USPAP Standards then it meets IRS standard for reporting and development of an opinion of value. USPAP standards are effectively stricter than IRS standards. How does this apply to the inspection? Many clients, borrowers, and lenders, lawyers, and CPA's frequently ask…."If the appraiser conducts only an exterior inspection, will the IRS accept the appraisal?"
The answer is YES, they will accept an appraisal in which only an exterior inspection is performed. USPAP does not require an inspection of the property being appraised. This question is addressed in the Frequently Asked Questions Section, 2020-2021 USPAP Edition on pages 266-277.
189. DRIVE-BY AND DESKTOP APPRAISALS
Question: Does USPAP permit real property appraisers to perform drive-by or desktop appraisal assignments?
Response: Yes. The Comment to Standards Rule 1-2(e) states, in part:
An appraiser may use any combination of a property inspection, documents, such as a legal description, address, map reference, copy of a survey or map, property sketch, photographs, or other information to identify the relevant characteristics of the subject property.
This is also discussed in Advisory Opinion 2, Inspection of Subject Property. It states:
An inspection is not required by USPAP, but one is often conducted. The extent of the inspection process is an aspect of the scope of work and may vary based on assignment conditions and the intended use of the assignment results. It is the appraiser’s responsibility to determine the appropriate scope of work, including the degree of inspection necessary to produce credible assignment results given the intended use.
190. INSPECTION OF SUBJECT PROPERTY
Question: Have I violated USPAP if I don’t inspect the interior of the subject property?
Response: USPAP has no requirement to inspect a subject property’s interior. Standards Rule 1-1(b) requires that an appraiser not commit a substantial error of omission or commission that significantly affects an appraisal. The Comment to that Standards Rule states, in part:
Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of the assignment results.
Standards Rule 1-2(e)(i) requires that an appraiser identify a subject property’s physical, legal, and economic characteristics. But, note that the required identification must be relevant to the type and definition of value and intended use of the appraisal. If an interior inspection is not relevant, it is not required. Determining whether an interior inspection is relevant is a scope of work decision. The SCOPE OF WORK RULE states:
An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.
Advisory Opinion 2, Inspection of the Subject Property advises that if adequate information about the relevant characteristics of the subject property, such as information that could only be obtained as a result of an interior inspection, is not possible by personal inspection or from sources the appraiser reasonably believes are reliable, an appraiser must withdraw from the assignment unless the appraiser can:
modify the assignment conditions to expand the scope of work to include gathering the necessary information; or
use an extraordinary assumption about such information, if credible assignment results can still be developed
The degree of inspection needed to define the property's qualitative characteristics and value-relevant attributes is an aspect of the scope of work of the assignment. It is the duty of the appraiser to assess the scope of work of the assignment and, thus, the degree of inspection needed to deliver accurate results of the assignment given the report's intended use and intended user(s).
For example, circumstances may be such that the assessor may not have access to the subject property in which case he or she may rely on detailed information given by others; or, the intended purpose of the assessment report may be for the client's personal purpose.
An appraiser can use any number of sources of information that he/she feels credible to define the quality characteristics and value-relevant attributes of the property being assessed. Although a personal inspection is an option, the inspection itself may not necessarily include all the information needed. Additionally, the appraiser may need to rely on information from other sources such as brokers, clients, borrowers, contractors, City and County Building and Planning Officials, or County Assessors.
The appraiser may likewise find it necessary to depend entirely on client-borrower provided data, for example, photos, floorplans, architectural drawings, permits, descriptions, so as to recognize the applicable attributes of the property being appraised. Such dependence may be fundamental when the subject property is not accessible for investigation as would be the situation on the off chance that it was destroyed, demolished, no longer under the clients possession, or when access to the subject property is denied to the appraiser, as often occurs during divorce cases. Other times, the property has been sold and the appraisal is a retrospective valuation based on a date of death that occurred prior to the sale.
Appraisal reports must contain a signed certification and statement confirming whether the appraiser inspected the property being appraised. All appraisal reports should likewise contain adequate data (typically positioned in the Scope of Work description) to allow the client and intended user(s) to comprehend the degree of inspection performed.
USPAP does not express an opinion on who inspects the property or takes photos of the property. USPAP does not require an appraiser to inspect the property being appraised. USPAP does not require the appraiser to photograph the subject property or the comparable sales or rentals. However, USPAP does require the appraiser to disclose the extent of the inspection. Moreover, USPAP does not indicate a need to include photographs of the subject as part of the formation of a credible or reliable opinion of value. Both these requirements are most often a component of conventional lender requirements, not USPAP.