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FREQUENTLY ASKED QUESTIONS
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An appraisal is simply the act or process of developing an opinion of value. An appraisal will determine an opinion of value on both personal property as well as real property in which is discussed here. A formal process is used in determining market value. Three common approaches to value are used, which are 1) the Sales Comparison Approach - this is the most common and most reliable method of determining market value. Taking into consideration, how real property rights are conveyed, financing terms, market conditions, location and physical characteristics are factors the are included with what recent and comparable sales has occurred in the area to determine value. 2) The Cost Approach - which is essentially separating the physical property from the land, calculating the replacement or reproduction cost of the physical property, less any accrued depreciation, and finally, the land value is added back in which results in an opinion of value. 3) The Income Approach - This method is primarily used with income producing properties (for example, a duplex). This method, simply stated, measures the present value of future benefits. The property's income stream and resale value are then capitalized into a present, lump-sum value. Is a home inspection the same as an appraisal? Back to top No, they are not the same. A home inspector essentially works for you while an appraiser typically works for and protects the lender. A home inspection is a visual inspection of the home that will provide a better understanding of the property’s current physical condition. A typical home inspection will include a survey and analysis of all house systems including roof, exterior and interior structure, storm water, plumbing, doors, windows, attic, basement and crawl spaces. The goal with the home inspection is to uncover as well as anticipate any problems that may affect the closing process, or involve significant cost to repair, replace or remedy. Once again, the appraisal is an independent evaluation of the current market value of a house or property. I just spent $50,000 on an in-ground pool, why is my value not higher? Back to topA common misconception with homeowners is thought that if a certain dollar amount is spent towards real property improvements, that this will increase the market value of the property by the same dollar amount. In the majority of cases, this is incorrect. In this example, even though the homeowner allocated $50,000 to install an in-ground pool, this does not increase the market value of the home from $250,000 to $300,000. It must be remembered that the "market", or the general paying public, is what determines what that pool is worth or how much more the market is willing to pay for that in-ground pool. For example, the pool with have more value in Arizona that it will here in Minnesota. There are many situations where homeowners will not get a dollar-for-dollar value on the improvement cost. According to RE/MAX, remodeling your kitchen can add up to 150 percent of the cost of the project to your home’s resale value. Adding a second bathroom increases your resale value by 90 percent of the project cost, and a room addition, such as a family room or an extra bedroom, provides a 60 to 80 percent return. What is Private Mortgage Insurance (PMI) and how can I get rid of it? Back to topWhen you purchased your home, you were required to obtain Private Mortgage Insurance (PMI) with your lender because your down payment on the home was less than 20 percent of the appraised value or sale price. This will enabled you to obtain a mortgage with a lower down payment because your lender is now protected against any default on the loan. PMI adds an additional cost to your monthly mortgage payment. Typically, PMI can be cancelled when the loan-to-value (LTV) is 80% (75% LTV with FNMA). Once your equity in the property reaches 20% you can typically cancel your PMI and begin saving immediately. Check with your lender for any rules applicable to your loan. Is training required for an appraiser to become licensed? Back to top Regulations pertaining to the licensing requirements will vary from state to state. In Minnesota, to receive registered training, fulfilling the 90-hour minimum requirement and pass both the Minnesota Real Property Appraiser exam and the Licensed Real Property Appraiser National Uniform Exam. All appraisers are also required to receive recurrent training which includes 30-hours of approved continuing education every two years which must include the 7-hour National Uniform Standards of Professional Appraisal Practice (USPAP). Appraisers must adhere to the strict industry code of ethics, the national standards of practice for real estate appraisal, and the rules for developing an appraisal and reporting its results. For more information, go to www.commerce.state.mn.us Who do appraisers work for? Back to top Appraisers typically work for lenders to determine the value of real estate involved in a loan transaction. However, appraisers also work for various cities, counties, attorneys, estates, Department of Natural Resources, corporations, etc. What does an appraiser do? Back to top Using the three common approaches to value, an appraiser will perform valuation services competently and in a manner that is unbiased, independent, impartial and objective to determine market value to be generally used in real estate decisions. This opinion of value will be presented in an appraisal report. Is there anything that I need to do before the appraiser arrives? Back to top The first step in most appraisals is the home inspection. During this process, the appraiser will come to your home and measure it, determine the layout of the rooms inside, confirm all aspects of the home's general condition, and take several photos of your house for inclusion in the report. The best thing you can do to help is make sure the appraiser has easy access to the exterior of the house. Trim any bushes and move any items that would make it difficult to measure the structure. On the inside, make sure that the appraiser can easily access items like furnaces and water heaters. The following Items, if available, will help your appraiser to provide a more accurate appraisal in a shorter period of time:
Who actually owns the appraisal report? Back to top Most of the time, the lender will order the appraisal. Even though the home owner pays for the appraisal, whether in the closing costs or prior to the appraisal taking place, the lender retains the right to use the report. The home owner/buyer has a right to the copy of the appraisal report and can have one provided at closing. Once the home owner/buyer has the appraisal report, he/she is not entitled to use that report for any other use without the permission from the lender. Of course, the exception to this is when the home owner/buyer personally requests the service of the appraiser. The appraiser will then stipulate how the appraisal can be used (for example, PMI removal, HELOC application, taxes, estate planning); if it is not stipulated, the appraisal can be used for any purpose. What is the best 'return-on-investment' in regards to a home renovation? Back to top According to RE/MAX, remodeling your kitchen can add up to 150 percent of the cost of the project to your home’s resale value. Adding a second bathroom increases your resale value by 90 percent of the project cost, and a room addition, such as a family room or an extra bedroom, provides a 60 to 80 percent return. Other improvements, such as new windows and doors or replacing the heating system, may be practical but they necessarily translate into resale profits." Taken from the Realtor® Magazine Online, this table shows the national average from 2000
A recent, local survey conducted in the Minneapolis, MN area revealed that the kitchen and bathroom(s) were the two best return-on-investment remodel projects that homeowners can do, with returns of up to 105% and 85% respectively. Log onto http://www.realtor.org/rmomag.NSF/pages/feature1dec05?OpenDocument or talk with your local real estate agent for more information. Besides the purpose of refinancing, what other uses does an appraisal have? Back to top Appraisals can be conducted for many uses, including:
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