Reviewing an appraisal report is a critical step in the real estate transaction process. It ensures that the appraised value of the property is accurate and justifiable. Here’s a comprehensive guide on how to review an appraisal report effectively, using anonymized information from a sample appraisal report.
1. Understand the Purpose of the Appraisal
An appraisal report is typically prepared to estimate the market value of a property for various purposes, such as underwriting a loan, determining a sales price, or settling an estate. The purpose of the appraisal must be clearly stated in the report, along with the date of the appraisal and the intended users.
2. Check the Property Details
Begin your review by confirming the basic details of the property being appraised:
Location: The report should clearly state the address of the property, including city, parish, and state.
Site Description: Look for details about the size, shape, and topography of the land, as well as any zoning information that could affect its use.
Improvements: The report should describe any buildings or other structures on the property, including their size, condition, and use.
3. Review the Scope of Work
The scope of work outlines the steps the appraiser took to complete the appraisal. This typically includes:
Property Inspection: An overview of the date and extent of the property inspection.
Data Collection: Information about the local market, property, and comparable sales.
Analysis: The methods used to arrive at the value conclusion, such as the Sales Comparison Approach, Cost Approach, and Income Approach.
4. Analyze the Valuation Approaches Used
Most appraisals will utilize one or more standard approaches to value:
Sales Comparison Approach: This method involves comparing the subject property to similar properties that have recently sold in the same area. Adjustments are made for differences between the properties.
Cost Approach: This calculates the cost to replace or reproduce the property, minus depreciation. It’s often used for newer properties or special-use buildings.
Income Approach: This is based on the income the property generates. It’s primarily used for commercial properties.
In the anonymized appraisal report, the Sales Comparison Approach was primarily used due to the property's historical operation as an owner-occupied facility and the buyer's intention to use it similarly.
5. Evaluate the Comparables
Comparables, or “comps,” are recent sales of similar properties that the appraiser uses to help determine the value of the subject property. When reviewing these:
Location: Ensure comps are in a similar location and share the same market influences as the subject property.
Physical Characteristics: Look for similarities in size, age, condition, and features.
Adjustments: Check that the appraiser has made reasonable adjustments for any differences between the subject property and the comps.
6. Check for Compliance and Assumptions
Appraisal reports must comply with the Uniform Standards of Professional Appraisal Practice (USPAP). The report should state compliance and note any assumptions or hypothetical conditions that could affect the value.
In the provided appraisal report, the appraiser assumed that the subject site would be cleared of all environmental conditions below a budgeted cost, which significantly impacted the valuation.
7. Review the Market Analysis
The market analysis should include data on the economic conditions affecting the property's value, such as:
Local Market Trends: Look for data on supply and demand, vacancy rates, and economic factors affecting the market.
Neighborhood Analysis: The report should describe the subject property's neighborhood and how it affects the property's value.
8. Consider the Final Value Conclusion
The final value should be supported by the data and analysis presented in the report. It should reflect a logical conclusion based on the appraiser's findings and the methodologies used. The appraisal report you are reviewing should state a clear final value and the date it is effective.
9. Look for Certifications and Signatures
The appraiser must certify that the report is accurate and complete to the best of their knowledge. This certification should be signed and dated, indicating the appraiser’s accountability for their work.
10. Identify Any Limitations or Conditions
Finally, look for any limiting conditions or extraordinary assumptions that could affect the valuation. This might include environmental concerns, property access issues, or other factors not fully explored in the report.
Conclusion
Reviewing an appraisal report involves careful consideration of the methods and data used to determine a property's value. By following this guide, you can ensure that the appraisal report you are reviewing is accurate, comprehensive, and reliable. Remember, a thorough review is essential for making informed real estate decisions.
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