Monday, August 27, 2007

A is for Appraisal

An appraisal is simply an estimate of value made by a certified appraiser. That is all...

However, there are a few other terms that are often used (wrongly) as interchangeable with appraisal. Other value estimates, such as a BPO or CMA are often confused with appraisals. While all three aim to accomplish the same thing, there are a few key differences.

The most common real estate valuation tool is a CMA. They may also be referred to as CMSs, but are essentially the same thing. While we generally agree on the initials, what they stand for varies from region to region, and even agent to agent. Almost everyone seems to agree on Market Analysis for the MA part, but the C might be either a Competitive or Comparative Market Analysis. So, we can say that a CMA is a Competitive Market Analysis or Comparative Market Analysis. Please note that the A should never stand for appraisal unless the agent is also a licensed appraiser. Regardless of the initials, a CMA is performed by a licensed real estate agent. The value is arrived by looking at comparative properties (comps). Features and amenities are taken into account to adjust for square footage, style of property, lot size and description, as well as general property condition. As with all comp based measures, the similarity and proximity of the comps, as well as the accuracy of any adjustments may have a huge impact on the quality of the result.

Another tool, although less common, is the BPO. BPO stands for Broker Price Opinion, and despite the name, can be performed by agents as well as brokers. The primary market for BPOs are banks or other corporate entities that are trying to get prices in order to dispose of property. A BPO is a bit more in-depth than most CMAs. It will include comps, as well as repair estimates. It allows the reviewer to determine if they are financially better off selling the property as-is, or if they should improve the property prior to sale. Again, the similarity and proximity of the comps will have a major impact on the quality of the results.

Appraisals come in several types, depending on the property being appraised, as well as the purpose of the appraisal. In some cases, especially true when replacement value is being calculated, or if the property is very unique, cost of current reconstruction is used for the basis. This may then be adjusted, again, depending on the usage of the appraisal. For a market value, there may be a mark-down from cost, but for an insurance value, there may not be. Market appraisals are another type of appraisal. These are quite similar to CMAs and BPOs, but may be more in-depth. Usually more emphasis gets placed on square footage and lot size, and less on buyer preferences. When a buyer is getting a loan, this is the type of appraisal the bank will order prior to approving the loan. Also note, that in most instances, the bank will only be concerned that the appraisal comes in higher than the loan amount. The main thing to remember about market appraisals is that they are also comp based, like CMAs and BPOs. The final appraisal type we'll cover is a tax appraisal. The way this is done will vary from market to market, but these are generally the least accurate valuation for a property. Here in GA, the last sale price is the value of the property and is adjusted by a blanket percentage whenever the county commission deems it appropriate. While it is quite accurate right at closing, within a few years, it might be very high or very low, depending on how your specific location has changed in value compared to the more general location you are in. I've seen just as many properties sell for half of the tax appraisal as I have that sold for twice the tax appraisal. For determining the value of a property that hasn't been sold for a few years, it is severely lacking in accuracy.

No comments: