Appraisal

Key Takeaways

• An appraisal is a supported opinion of what one property is worth as of one specific date, prepared by a licensed or certified appraiser.
• An appraisal is an opinion rather than a fact, so two competent appraisers working from the same data can reach different conclusions.
• The three recognized approaches to value are the sales comparison approach, the cost approach, and the income approach, and the appraiser reconciles them instead of averaging them.
• In Washington a broker price opinion may not be used as the appraisal in a federally related transaction (RCW 18.140.020).

What It Means

An appraisal is a written, supported opinion of what a specific property is worth on a specific date. The appraiser inspects the property, gathers market data, applies recognized valuation methods, and explains how that evidence leads to the number. The effective date matters as much as the number, because a value opinion is tied to market conditions on the day it is drawn.

Appraisers work from three approaches. The Sales Comparison Approach takes recently sold similar properties and adjusts their prices up or down for each difference from the subject. The cost approach estimates what it would cost to rebuild the improvements, subtracts depreciation, and adds land value. The income approach converts a property's expected income into a value figure. On a single family home the sales comparison approach usually carries the most weight, and the appraiser reconciles the approaches into one conclusion.

The output is an opinion of Market Value, the price a willing buyer and a willing seller would agree on with neither under pressure. Lenders order appraisals because that number becomes the denominator of the Loan To Value Ratio.

How It Works in Washington

In Washington, appraising is a licensed occupation of its own, separate from a real estate license. RCW 18.140.020 provides that no person other than a state-certified or state-licensed real estate appraiser may receive compensation of any form for a real estate appraisal or an appraisal review, and that a person who is not certified, licensed, or registered under that chapter may not prepare any appraisal of real estate located in this state. Chapter 18.140 RCW is administered by the Department of Licensing.

That line matters to brokers. The same section allows compensation for a broker price opinion prepared by a real estate licensee licensed under chapter 18.85 RCW, so long as the opinion carries the required disclaimers, including a statement that it is not an appraisal as defined in chapter 18.140 RCW. RCW 18.140.020 also bars a broker price opinion from being used as an appraisal in connection with a federally related transaction. A Washington broker can therefore price a property for a seller, and a Comparative Market Analysis Cma is ordinary listing work, but the broker cannot cross into appraising for a lender.

Example

Ellis has a purchase and sale agreement on a house in Olympia at $499,000 with a 90 percent loan. The lender orders an appraisal, and Karen, a state-certified residential appraiser, works the sales comparison approach.

Comparable A sold for $505,000 but has an extra half bath and 200 more square feet, so Karen subtracts $4,000 and $12,000 for an adjusted value of $489,000. Comparable B sold for $478,000 with no garage, so she adds $15,000 for the subject's garage and lands at $493,000. Comparable C sold for $495,000 nine months ago in a rising market, so a $6,000 time adjustment brings it to $501,000.

Karen weights A and B most heavily because they needed the smallest adjustments, and reconciles to an opinion of value of $492,000. The lender now sizes the loan on $492,000 rather than on the $499,000 price, so the 90 percent loan falls from $449,100 to $442,800 and Ellis has to bring $6,300 more to closing or renegotiate with the seller.

Common Mistakes and Exam Traps

• An appraisal is an opinion of value, not a determination of value, so answer choices calling it a guaranteed or exact value are wrong.
• Market value is what a property should sell for under normal conditions, while market price is the figure it sold for; the appraisal estimates market value.
• Cost is not value, which is why the cost approach subtracts depreciation; a $60,000 kitchen remodel rarely adds $60,000 to the appraised value.
• A comparative market analysis and a broker price opinion are broker products, and in Washington neither may serve as the appraisal in a federally related transaction.