What I’ve always loved about working in the appraisal field is the opportunity to get out into the community daily. Being immersed in the local real estate market has helped me develop a keen insight into the economic factors that influence properties in my community of Massachusetts. Part of the reason we write this blog is to share with you what we’ve learned from our practical experience. There’s not a lot of public education out there regarding the subject of appraisal and the valuation process, so we’ll bridge the gap here.
The Inspection
The inspection is the first and probably the simplest step of the appraisal process. As soon as we receive an order, we confirm all the information and reach out right away to property owner, borrower, or point of contact to schedule the inspection. When possible, we get a jump start by completing inspections the same day, or at least the following morning. That gives me the most time to write the report and fulfill our service promise to clients.
From there our goal is to get the report researched, written, quality checked, and delivered in as few days as possible, sometimes as little as 48 hours for residential reports.
Gather Property Info and Confirm Details
After we’ve photographed the property and the neighborhood, we return to the office and start our research. We pull a property tax profile to compare listing info with tax data to check for errors or inconsistencies. If anything needs to be confirmed, we inquire with the appropriate parties to ensure the validity of the report. We’ve learned from our mistakes (not too many) and know that it’s much more efficient to confirm property details before, rather than needing to rewrite and re-review the report due to erroneous data. In the high-stakes world of real estate investment, accuracy and accountability are critical.
Comparable Selection & Adjustments
Once we’ve sorted out the property specs, we move on to the most fun part (in my opinion) of the appraisal process: selecting comparables.
Searching for comparables is kind of like a cross between a matching game and a fun Google Maps session, which I’m fairly certain both are universally enjoyed by all ages. Just as you might search through active and sold listings on your favorite real estate listings site, we use professional data sources to identify on and off-market transactions. We use both MLS and tax sale data to make sure the report accurately reflects the retail and investment submarkets.
If you’re using the substitution method on your home or investment property, make sure the data source you’re relying on is current; many of the consumer real estate websites have incomplete, inaccurate, and obsolete data. I start off by filtering for properties sold within the last 6 months. That’s generally a good figure in a stable market. If the market is moving very quickly, you can shorten the search window to 3 months or less. We then further filter location and property aspects such as age, condition, style, living area, and other key characteristics.
Once I’ve found the best sold comparables, I move on to isolating the most similar active listings on the market; those with prices, features, conditions and marketing times that are representative of the overall market and inventory (we want to make sure the listing is relevant and no undue influence skewed the value or days on market). All that remains at this stage is to make adjustments, both positive and negative, to account for the value of the differences between each property and our subject.
Income and Cost Approaches
When we’re working on a commercial or multi-family appraisal, we also utilize the income and cost approaches. As the names imply, these strategies use either the net operating income (NOI) of the property (former) or reproduction/replacement cost (latter). I particularly enjoy using these methods, but I also love numerical and technical pursuits.
These methods usually require more time and diligence than what is necessary for a residential appraisal. Fortunately, data is more abundant that ever. Regional commercial market databases allow us to create advanced regression models to indicate estimated value, in far less time thanks to modern processing power.
Reconciliation – What are the numbers telling us?
Next, we need to bring it all together and make a conclusion. To make the most accurate estimate of value we need to review the report as a whole and look at what the numbers are telling us. While the market may be rising overall in a community, the value of specific property types therein may be declining due to changing tastes and consumer habits. If we didn’t segment the data by the same property type, our entire report and conclusion could be faulty.
During this reconciliation phase we evaluate how each market signal interrelates and influences the probable value of the property. At this point, I look at all the comparables and rank them by their similarity to our subject. In the case of income or special use properties, we’ll compare the results of each appraisal approach (substitution, income, and cost).
QC – Quality Control
It could be asserted that quality control (OC) is the most important step in the process. After we’ve prepared the report, we work together to review each report to ensure oversight, accuracy, and absence of bias. Rather than only one reviewer having the final say over suitability, each report goes through review by multiple certified SRA and MAI appraisers.
This is where an efficient business model can make the real difference in appraisal report turn times. While the appraiser may complete the inspection and report in a few days, some appraisal management firms take up to two weeks to get through quality control. Working together as a team lets us get this process done in a few hours rather than a few weeks.
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