Appraisal Basics for the Real Estate License Exam
A real estate agent needs to know about property value for a number of reasons; one being the questions on the Real Estate License Exam. An agent usually helps a seller set an asking price for a property when it’s being offered for sale.
An agent representing a buyer often advises his client on the values of properties that are being considered for purchase. Finally, a knowledgeable agent provides important information to the appraiser when she completes the mortgage appraisal.
What is an appraisal?
An appraisal is an estimate or opinion of value. This definition often appears on state licensing exams.
The words estimate and opinion are important in this definition. Although appraisers use a variety of mathematical techniques in their work, the act of arriving at the value of a particular piece of property can never be that precise. So appraisers never say that they calculate value.
An appraiser is a researcher, a private detective. To come up with an estimate, the appraiser investigates the following.
Economic factors: Employment and interest rates.
Environmental factors: The presence of pollutants in the area or on the land.
Physical factors: The real estate’s location, size, and condition.
Social factors: Demand for a particular type of housing (such as demand by an aging population for a certain type of house).
The property being appraised is called the subject property. Although the definition of the term subject property isn’t critical for exam purposes, you need to understand the reference whenever you’re asked a question that refers to the property being appraised.
Another important item to remember is that the client hires the appraiser to provide an objective opinion of the value of a property. Most appraisers work independently on a fee-for-service basis; therefore, they have no interest in what the property value is. Furthermore, the code of ethics and standards that licensed and certified appraisers must follow requires them to reveal any interest in the property they’re appraising to the client.
Say you find a property you want to buy, and you want to find out whether the asking price is fair. You look in the yellow pages, and hire Mary Appraiser, but it turns out that Mary’s mother owns the property. Mary must tell you about her interest in the property or be in violation of the code of ethics and standards.
Why you need an appraisal
Hiring an appraiser for real estate transactions often is a big decision and many reasons merit such a step. Anytime value is an issue, you may want to have an appraisal done. The following list includes reasons why people most often have appraisals done.
For exam purposes, however, what you need to remember from the following information is a general list of the reasons appraisals may be done:
Buying: Buyers of real estate can hire an appraiser to determine the fairness of the asking price of the property.
Eminent domain: When the government seizes privately owned real estate for public use through eminent domain, it must pay for the property. The government determines the amount of payment with the help of an appraisal.
Estate valuation: When someone dies, federal or state taxes may have to be paid on the value of the estate. If the estate includes real estate, the property has to be appraised to establish the estate’s value as of the date of death.
Exchanges of ownership: When owners exchange real estate, rather than selling it for money, the appraiser establishes the values of the properties to determine the fairness of the exchange.
Mortgage approval: Mortgage lenders, that is, banks, savings and loan associations, and other lenders order the vast majority of appraisals. When buying or refinancing a property, the borrower puts the property up as collateral. If the property owner defaults on the loan, the lender takes the property and sells it. The lender wants to be sure that if the owner defaults, the property value covers the loan.
Property taxes: Real estate taxes are based on assessed values, which, in turn, are based on market values. Appraisals are sometimes done for clients who want to argue with municipal (city, town, and village) tax assessors for lower assessed values to obtain a reduction in taxes.
Selling: People who want to sell their real estate can seek an appraisal to determine a fair and competitive asking price for their property. Most often a seller asks a real estate agent for his opinion of value when preparing to sell a house.
Taxes other than property taxes: Taxes often are due when someone gives a piece of real estate to someone as a gift. Alternatively, there may be a tax benefit in the form of a deduction if someone gives real estate to a charitable organization. In both cases, an appraiser comes in to determine the property’s value.
Various court proceedings: Bankruptcy, divorce, and the dissolving of a partnership or corporation may all involve real estate holdings. Appraisals usually establish the value of the property in question.