What is a home appraisal?

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On this episode of the podcast, Listen Up Home Buyers! Jeremy Manning, an appraiser and exclusive buyers agent, explains the appraisal process.

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In this conversation, Victoria Ray Henderson interviews Jeremy Manning, an appraiser and exclusive buyers agent, to explore the intricacies of the appraisal process. They discuss the role of appraisers, the importance of independence and competence, and how appraisals verify property values for lenders.

Jeremy explains the sales comparison approach, the significance of accurate market analysis, and how real estate agents can assist in providing valuable information to appraisers.

The conversation also touches on the standards and guidelines that govern the appraisal industry, emphasizing the need for consumer-oriented laws to protect buyers.

Takeaways

• An appraisal verifies that a home is worth the loan amount.
• Appraisers must be independent and competent in their evaluations.
• The sales comparison approach is crucial for determining property value.
• Real estate agents can provide valuable information to appraisers.
• Pictures of properties can be misleading; actual inspections are important.
• Appraisers rely on MLS data for comparable sales analysis.
• Understanding appraisal reports is essential for homebuyers.
• Appraisers follow strict guidelines to maintain credibility.
• Consumer-oriented laws are necessary to protect buyers in the appraisal process.
• The appraisal process is vital for ensuring fair property valuations.

Victoria Ray Henderson:

Hello and welcome to Listen Up Homebuyers. I'm Victoria Ray Henderson. With me today is Jeremy Manning. Jeremy is an appraiser in the state of Virginia and he is also a new exclusive buyers agent with Homebuyer Brokerage. Jeremy, it is wonderful to have you on the podcast.

Jeremy Manning:

Thank you, Victoria. Thanks for inviting me.

Victoria Ray Henderson:

I'd like to talk about appraisals. That is your area of expertise. Surprise, surprise. I'm going to ask you questions about that. So many people who are certainly first-time home buyers don't understand what goes into applying for a loan and how the appraisal fits into that process. So could you walk me through from start to finish what exactly is an appraisal?

Jeremy Manning:

An appraisal, at least in the way that we're framing it here, is done for the lender in order to verify that the home that they're lending money on is actually worth at least the amount of money that they're gonna lend. The appraiser is a third party, independent third party who has to be neutral and operate without bias for any of the parties in the transaction.

Jeremy Manning:

Completely separate and their responsibility is to come up with a market value of the property on a specific date. For lending, it's almost always for the date that they do the inspection. The key components are always going to be one, that impartiality, the appraiser must be independent. Two, the appraisers gotta be competent and the report that they generate has to be credible.

Victoria Ray Henderson:

If someone is applying for a loan, they're going to have an appraisal ordered and someone like you, a real estate appraiser, goes out to the property and does that independent evaluation.

Victoria Ray Henderson:

How does an appraiser begin the process of evaluating the value of a property?

Jeremy Manning:

No, that's a good question. One, the appraiser has got to be competent in the area where they're working, in the area and the property type that they're looking at. So an appraiser, they've got to have a good grasp of knowledge of the property type they're working with, the neighborhood. And then they've got to put together a scope of work for how they're going to do the project. They're going to do.

Jeremy Manning:

Define the market value that they're looking for. Because there are different types of value and having a good understanding of what the definition of value is is really important. And in most lending transactions, especially for residential, that's all going to be the same every time. It's always in the same form. It's called a 10.04 URA report.

Jeremy Manning:

They're going to be able to put together that scope of work, ensure that the highest and best use of the property is the use that it's currently put to, and then put together the evidence of value that they've got for the property.

Victoria Ray Henderson:

Okay, when you talk about the scope of the work, are you talking about doing comparative market analysis, which is something that I know real estate agents do, but yours is next level. So talk about that difference.

Jeremy Manning:

So it's next level because it's for a different purpose. So what I'm going to do as an appraiser is I'm going to do a sales comparison approach, which is their verbiage, usually comparative market analysis. When they're doing a sales comparison approach, they're to be doing very much the same thing that you're familiar with. They'll take comparable sales. They will analyze those sales compared to the subject property that you're looking at. And then they'll make adjustments for the differences. I think the key differences are going to be an appraiser is responsible for providing a report that's credible. Anybody else who's doing a comparative market analysis is really they're shooting for accuracy. They want it to be right on. But an appraiser has to go a step beyond that. They're obviously trying to be correct. But they've got to be credible. And that's the key difference. They've got to back everything that they say up with evidence that is either in the report or some stuff that they'll maintain in their work file that they're responsible for maintaining on the property as well.

Victoria Ray Henderson:

Mm-hmm. And so when I've looked at appraisals, I see when you're talking about credibility is part of that the fact that an appraiser will evaluate house number one, which has no updates, kitchen and bathroom since the 1950s to house number two, which may be the subject property. And the appraisal reflects the difference in value according to those upgrades or lack thereof. Is that correct?

Jeremy Manning:

Yeah, that's a good example of an attribute that an appraiser would look at in a sale compared to a subject property that they're responsible for appraising. Another example, they're going to adjust for a location. In the market recently, they've had to make adjustments based on the time that the comparable property sold. If it sold six months ago and there's been a lot of change in the market, they're going to have to make adjustments for that too.

Victoria Ray Henderson:

Okay.

Victoria Ray Henderson:

Mm-hmm.

Victoria Ray Henderson:

Right. Interesting.

Jeremy Manning:

That can be pretty complicated to come up with specifics on what those adjustments should be.

Victoria Ray Henderson:

Yeah, I bet. I bet because the market is really shifting right now. when you talk about comparing, you look at the lot and a corner lot or a lot that sits on a busy road. Is there some sort of evaluation that you do that either adds value or subtracts value depending on that lot?

Jeremy Manning:

Yeah, absolutely. In a case like that, the appraisers best analysis would be to find a sale of a home that's exactly like the one that's sitting on the corner, but that isn't sitting on a corner. And then to compare the different sale prices between those two properties. And sometimes you've got to make additional adjustments and it can get a little hairy. And sometimes you're taking like, if you're doing an appraisal, mass appraisal, like your local assessor does, they're going to take all of the sales that took place in a huge area and analyze those together to come up with adjustments for those different attributes. yeah, in most cases, you're just looking for the best evidence you can find that's local to the subject property and that will help you come up with a credible adjustment that can be made to explain that difference in value.

Victoria Ray Henderson:

When I am doing comps, a comparative market analysis for a client, I'm really looking at pictures. I can't get into the house that's old, obviously. I'd love to, but that would be illegal. So I can't go marching into somebody's house to see, you know, what exactly does this look like? Because sometimes pictures can be very deceiving. And I know many clients I've worked with where they see pictures, they want to see the house, and they're supremely disappointed when they get there because the listing agent did a good job of advertising, but it doesn't really reflect the actual quality of the home.

Jeremy Manning:

Especially now when you can take a picture and have AI adjust it to look like whatever you want it to look like. So there are definitely things to look out for and appraisers face the exact same problems. We do get to inspect the property that's the subject of the report that we're putting together. But most of time we're relying on the MLS to see what the comparable sales look like. Unless that appraiser has had a chance to go through that house for one reason or another for a previous project or whatever.

Victoria Ray Henderson:

Yeah.

Jeremy Manning:

They're not going to know that type of information any better than other real estate professionals in the area would.

Victoria Ray Henderson:

Mm-hmm. Do appraisers serve the area where they're located and licensed? In other words, if I have a buyer who's using a lender in Oklahoma and that lender calls in an appraisal, how exactly does that work? Where is he calling and where do those bank of appraisers come from?

Jeremy Manning:

Right now, yes, ideally it would be a local appraiser. When a lender needs to get an appraisal, they will contact there's a middleman called the appraisal management company that they'll contact that has a bank of appraisers that they contract with. And they'll select one of those. And then you'll pay that middleman for the appraisal. And then they'll pay the appraiser. And that's all done to keep the appraisers independent from the lenders. After 2008, Dodd-Frank, there were a lot of changes that were put in place.

Victoria Ray Henderson:

Thank

Victoria Ray Henderson:

Hmm.

Jeremy Manning:

There's good arguments to be made as to whether those changes were entirely positive or negative, but that's how it works right now. In most cases, a lender has to call an AMC or an appraisal manager to schedule an appraisal.

Victoria Ray Henderson:

I see.

Jeremy Manning:

It's important that, your viewers actually understand, especially those that are real estate professionals, how they can participate in the appraisal process in a, in a meaningful and positive way. Listing agents can really help by one, putting together a good list of updates and upgrades that have been made to the property that's being appraised. If they can provide that to the appraiser without trying to influence value in any way or anything like that. If they could provide the comparable sales that they use to come up with a list price.

Victoria Ray Henderson:

Mm-hmm.

Jeremy Manning:

To the appraiser. Some appraisers will say, no, I want to stay totally independent, but most will say, that'd be really useful. Thank you. And especially for the appraiser. Yeah.

Victoria Ray Henderson:

To get an idea. As an exclusive buyer broker, I really appreciate a list of actual dates and facts and things that they can, know, receipts, they can back that up with. As you're looking and evaluating the property, you can say, I see this French drain went in last summer or the roof was put on at this exact year and here's the roof warranty. Those are things that really add value to and actually not even just value, a level of comfort to the buyer. It's very, very helpful.

Jeremy Manning:

I agree. And the funny thing is that appraisal technically is being done for the lender, I highly recommend understanding how an appraisal report works and how it's read.

Victoria Ray Henderson:

It's my understanding that because the buyer pays for the appraisal, they get the copy of the appraisal.

Jeremy Manning:

You're absolutely right. They are paying for the appraisal and they get a copy of it.

Victoria Ray Henderson:

Great.

Jeremy Manning:

Appraisal industry is just like any other where you've got some really conscientious, high quality appraisers that are doing their best to provide a report that supports all of the adjustments that they make and that demonstrate that they've taken a good conscientious look at the property in an independent way.

Jeremy Manning:

We are very closely monitored as an industry by the state in which we operate. And

Victoria Ray Henderson:

Good.

Jeremy Manning:

Every time an appraiser goes out and puts together an appraisal report, there are standards and guidelines that they absolutely have to follow. You can get pretty severe penalties for neglecting in those areas. That's where we're coming from.

Jeremy Manning:

They have to follow the guidelines they have to follow the it's called USEPAP uniform standards of professional appraisal practice and they have to follow that or they can experience severe penalties and lose their license and that's the only difference only thing that really makes an appraiser special

Victoria Ray Henderson:

Hmm.

Jeremy Manning:

Is that they're following those guidelines.

Victoria Ray Henderson:

It's good. We need more consumer oriented laws in place because buyers need everything that they can get.

Victoria Ray Henderson:

Jeremy Manning is an appraiser in Virginia and also an exclusive buyers agent with Home Buyer Brokerage. Jeremy, it's a pleasure, first of all, having you with the brokerage, but secondly, having you here to kind of walk us through appraisals and that process. Thank you so much for joining me.

Jeremy Manning:

Thank you, Victoria. I really appreciate this opportunity. It's been fun.

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Questions about this podcast? Contact HomeBuyer Brokerage at Victoria@homebuyerbrokerage.com

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How can we help?

The exclusive buyer agents at HomeBuyer Brokerage specialize in serving home buyers. Please reach out with questions at info@homebuyerbrokerage.com.