Real Estate Tips Archives – Page 2 of 4 – Boston Appraisal Services

The Role of Appraisals in Property Disputes: A Comprehensive Guide for Lawyers

Property disputes can come in many forms: from squabbles between neighbors about boundary lines to legal battles in a divorce proceeding over shared assets. In these situations, a property appraisal can be an indispensable tool in the lawyer’s arsenal. By providing an objective assessment of the property’s market value, an appraisal can aid in dispute resolution, assist in legal arguments, and guide negotiations. This guide aims to provide a comprehensive understanding of the role of appraisals in property disputes, and how they can be leveraged for optimal outcomes.

Defining Appraisals

An appraisal is an unbiased, professional assessment of the value of a property, conducted by a certified property appraiser. This process involves examining a range of factors, including the property’s location, its condition and features, any improvements made, and the value of comparable properties in the local market. The final appraisal report gives an estimated market value of the property, providing a financial baseline for negotiations, settlements, and legal arguments.

The Crucial Role of Appraisals in Property Disputes

The critical role of appraisals in property disputes is multi-faceted, with several key functions that can significantly influence the outcome of a dispute:

Establishing Fair Market Value: Perhaps the most important role of an appraisal is that it establishes the property’s fair market value. Given that property disputes often revolve around differing perceptions of value, an appraisal can help settle these disputes by offering a value that is unbiased and free from personal interest.

Supporting Legal Arguments: An accurate, well-conducted appraisal can also serve as a substantial piece of evidence in a court of law. If you are arguing that a property has been undervalued or overvalued, for instance, an appraisal can provide the evidence necessary to support your claim.

Facilitating Settlements: Having a credible appraisal in hand can be instrumental in promoting settlements. When parties have a clear understanding of the property’s value, they are often more likely to reach an agreement and avoid a prolonged court battle.

Maximizing the Benefits of Appraisals

Understanding the role of appraisals in property disputes is only the first step. For lawyers, effectively utilizing appraisals is a skill that can significantly enhance their ability to represent their clients:

Select a Qualified Appraiser: The first step in ensuring a reliable appraisal is hiring a qualified, certified appraiser. The appraiser’s expertise, reputation, and credibility can greatly impact the perceived reliability of the appraisal.

Understand the Appraisal Process: Having a thorough understanding of how appraisals are conducted can help you scrutinize the appraisal report effectively. It can also aid you in cross-examining the opposing appraiser, if required, and identifying any potential flaws or biases in their assessment.

Obtain Multiple Appraisals: In some cases, obtaining multiple appraisals can be beneficial. If the values determined by different appraisers differ significantly, it can open up room for negotiation and provide further evidence to support your case in court.

Utilize Appraisals in Negotiation: The value determined by an appraisal can serve as a solid foundation for negotiations. It provides an objective, monetary figure around which discussions can revolve, potentially making the negotiation process smoother and more productive.

Appraisal Challenges

While appraisals are a valuable tool, it’s also essential to be aware of potential challenges:

Subjectivity: Despite efforts to maintain objectivity, an appraisal can sometimes be influenced by the appraiser’s judgment. As such, it’s important to critically examine the appraisal for potential bias.

Market Fluctuations: Property values can fluctuate due to market conditions. An appraisal is a snapshot of a property’s value at a given time, and may not represent the value at a later date.

Discrepancies in Appraisals: Sometimes, different appraisers may come up with different values for the same property. In such cases, the reasons for the discrepancy should be explored and addressed.

Appraisals play an indispensable role in property disputes, providing an objective valuation that can guide decision-making, bolster legal arguments, and encourage dispute resolution. By understanding the appraisal process and effectively utilizing the results, lawyers can dramatically improve their ability to represent their clients in property disputes. However, it’s also essential to critically examine appraisals, understanding that they are a tool – highly effective, but not infallible. By doing so, you can use appraisals to their fullest potential, driving toward a fair and efficient resolution of the dispute at hand.

0 Comments/by Boston Appraisal Services

Understanding Capitalization Rates, Interest Rates, and Yield Rates in Real Estate Valuation

Real estate investing is not as simple as purchasing a property and waiting for its value to appreciate over time. There are various financial concepts and metrics that investors need to understand to make informed decisions. Capitalization rates, interest rates, and yield rates are among the most critical of these concepts. Let’s dig deeper into each of these and gain a better understanding of their significance in the field of real estate.

How Capitalization Rates Affect Real Estate Valuation

The capitalization rate, or cap rate, is a real estate valuation measure used to compare different real estate investments. It is calculated by dividing the net operating income (NOI) by the market value or purchase price of a property.

Cap Rate = Net Operating Income / Current Market Value

The cap rate offers investors a quick method to compare the relative value of different real estate investments. It measures the potential return on investment, ignoring any debt involved. Essentially, the cap rate is the ratio of the income a property is expected to generate against its total value.

A higher cap rate indicates a potentially higher risk and consequently a higher return on investment. Conversely, a lower cap rate might indicate lower risk and thus a lower return. This means the cap rate can affect the valuation of a real estate investment significantly. If a property has a cap rate that’s too high compared to similar investments, it could suggest inherent risk factors, like the possibility of lower occupancy rates or higher maintenance costs.

How Interest Rates Affect Capitalization Rates

The interest rate, as set by a central bank such as the Federal Reserve, is a significant determinant of the cap rate. The reason is simple: interest rates represent the cost of borrowing money, and when this cost fluctuates, it impacts the profitability of an investment.

When interest rates are low, investors are more willing to pay higher prices for properties, driving down the cap rates. However, if investors are able to borrow money at a lower cost, they can afford to accept a lower return on their investment, hence the lower cap rate.

Conversely, when interest rates are high, the cost of borrowing money increases. This increases the risk of investing in real estate, so investors demand a higher return for the increased risk, which results in higher cap rates. Therefore, cap rates and interest rates are indirectly proportional to each other.

Difference Between Capitalization Rates and Yield Rates

While cap rates and yield rates may seem similar, they are distinct concepts in real estate investing. We’ve already discussed cap rates, so let’s understand yield rates. A yield rate is the total return on an investment, inclusive of any changes in the value of the investment over time. It can also be considered as the annual income from an investment divided by the total cost of the investment.

A key difference between the two is that cap rates only consider the income expected in the next year, while yield rates consider the entire investment term. Yield rates also consider the changes in the property value, whether due to appreciation or depreciation.

Thus, yield rates provide a more comprehensive overview of an investment’s profitability over its life. In contrast, cap rates provide a snapshot of the potential profitability of an investment at a given moment in time.

In Conclusion: Cost of Borrowing, Interest Rates, Capitalization Rates, and Purchasing Power

To conclude, the cost of borrowing is essentially the interest rate set by the central bank, like the Federal Reserve. This interest rate not only affects the capitalization rates but also the purchasing power of investors.

When interest rates are low, the cost of borrowing decreases, which can increase the purchasing power of investors. They can borrow more for the same cost, allowing them to invest in properties with lower cap rates. Conversely, when interest rates are high, the cost of borrowing increases, reducing the purchasing power of investors, who then tend to seek properties with higher cap rates to offset the increased cost.

Understanding these concepts and their interrelation provides a robust foundation for making informed real estate investment decisions. It enables investors to assess risk and potential return, determine fair property values, and understand how changing economic conditions might affect their investments.

Given the complexities of capitalization rates, interest rates, yield rates, and their roles in property valuation, an experienced appraiser can offer invaluable guidance and support. This is where we, at Boston Appraisal Services, can be of assistance.

An appraiser’s job is to provide an unbiased, expert opinion on the value of a property. They accomplish this by thoroughly understanding the interplay of these financial metrics and the local market conditions. Having an accurate valuation is essential in real estate transactions to ensure that the price being paid for a property is fair and reflective of its true value.

Boston Appraisal Services is a leading real estate appraisal company that specializes in complex commercial and residential appraisals. Our appraisers have the expertise to help clients navigate the ever-changing Boston real estate market. We offer a comprehensive range of services to meet all your appraisal needs, from single-family homes to multi-million-dollar commercial properties. Whether you are an expert investor, a first-time homebuyer, or a business owner, our team can provide you with a precise, reliable appraisal that you can use to make confident real estate decisions.

0 Comments/by Boston Appraisal Services

When to Apply Extraordinary and Hypothetical Assumptions

The process of determining a property’s market value is called a real estate appraisal. The person who appraises the property, the appraiser, physically inspects the property to measure it, take pictures of it, and make note of the condition and the quality of the construction.

The appraiser also needs to be aware of the zoning regulations, city ordinances, and other restrictions that can affect the value of the property. He may also need to know about any recent changes in the neighborhood, such as new constructions, new roads, and new amenities, as well as any special features that can affect the property value. Finally, the appraiser needs to consider the economic conditions, such as supply and demand, population density, demographics, economic trends, and the job market.

After the appraiser completes all the necessary research, he writes a report to present his opinion of the market value of the property. The report must be detailed and include all the information needed to support his opinion. The appraiser must also provide an explanation of how he arrived at the value, as well as any assumptions and adjustments made. The report must be signed and dated by the appraiser in order to be used by the client.

This is of course how a typical appraisal report is generated. Oftentimes, appraisers face situations where a physical inspection alone may not provide all the relevant data required. In the case of a new construction property, the appraiser may only be able to inspect a vacant plot of land; the proposed house is still not built. Or, the appraiser may not have been granted access to the interior of a house such as in the case of exterior appraisals. In cases like this, the appraiser has to make assumptions about information that cannot be physically verified or collected firsthand.

Whenever an appraiser determines that making an assumption is necessary, he typically makes one of two types of assumptions. The types are either Extraordinary Assumptions or Hypothetical Assumptions. This article will explain what these two are and the situations in which an appraiser might employ them.

Extraordinary Assumption:

USPAP defines an Extraordinary Assumption as a presumption that, if proven to be wrong, could change the appraiser’s judgments or findings. It is directly related to a specific assignment as of the effective date of the assignment results. What does this mean?

It means that the appraiser is dealing with uncertain information and is assuming something to be true. The information that the appraiser is uncertain about could be about the physical, legal, or economic characteristics of the subject property. Or, more generally, it could be about things external to the property, such as market conditions or trends; or about the integrity of the data used in an analysis.

A simple, common example would be when an appraiser is not able to complete a full physical inspection. An appraiser may discover that one unit in a multifamily property is locked and inaccessible. While they inspected the other units and have firsthand information about them, such as the number of bedrooms, bathrooms, the condition and quality of the interior, etc.; the appraiser doesn’t know what this locked unit contains or what condition it might be in.

In situations like this, the appraiser makes an Extraordinary Assumption. The appraiser assumes this locked unit matches the public record information, that it has the reported number of rooms, and is in line with the reported quality and condition. He further assumes the locked unit is in conformity with the rest of the subject and matches with what the appraiser was able to inspect. This assumption is specific and tied directly to the subject property and is made as of the effective date of the appraisal.

Hypothetical Assumption:

USPAP defines a Hypothetical Assumption as a condition, that is directly related to a specific assignment, and which is contrary to what is known by the appraiser to exist on the effective date of the assignment results but has been used for the purpose of analysis. What does this mean?

It means that the appraiser is making an assumption that is contrary to known facts; in other words – the appraiser is making an assumption about the subject that is not actually true. The assumption might be about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.

A simple, common example would be when an appraiser completes a report on a proposed, new construction property. The appraiser does his work based on architectural plans and construction specifications, all providing details about a subject property that is yet to be built.

At the time of the appraisal report and on the effective date, the subject property might just be vacant land. However, for the purpose of analysis and in order to actually produce the report; the appraiser assumes that the property is already complete. He or She further assumes that this hypothetical property conforms with the plans and the specifications provided.

Required Disclosures:

Whenever an appraiser makes a Hypothetical Assumption or an Extraordinary Assumption, there are requirements that these assumptions be made with proper disclosures.

Extraordinary Assumptions must be clearly disclosed in the appraisal report, and the report must notify intended users that the extraordinary assumptions might have affected the assignment results. The appraiser need not report on the impact of this assignment condition—only that it might have affected the assignment results. Though an extraordinary assumption might be employed in an assignment, there is no USPAP requirement that it be labeled as such.

Hypothetical Assumptions must be clearly disclosed in the appraisal report, and the report must notify intended users that the hypothetical conditions might have affected the assignment results. Again, the appraiser need not report on the impact of this assignment condition—only that it might have affected the assignment results. Additionally, a Hypothetical Condition might be encountered in an assignment, there is no USPAP requirement that it be labeled as such.

An appraisal is not inherently flawed because it is premised on a hypothetical assumption. An appraisal is not erroneous because it is premised on an extraordinary assumption. In some cases, it may be impossible to provide a value that is not premised on an assumption.

Assumptions and hypothetical conditions are established at the beginning of the valuation process and the valuation proceeds from that basis. The use of assumptions, whether extraordinary or hypothetical, may affect the Scope of Work for an appraisal. The Scope of Work in turn affects how the valuation or review process is carried out, and that in turn can affect the assignment results (e.g., the value opinion in an appraisal). In all cases, the use of an assumption or a hypothetical condition must result in a credible opinion or conclusion, given the intended use.

1 Comment/by Boston Appraisal Services

3 Reasons Why an Appraisal Comes in Low

Have you jumped on the refinance bandwagon? If not, you may want to consider it. As of the end of October 2020, interest rates on a 30-year refinance mortgage were averaging around 3.2%. These are the lowest rates in the last 40 years! If you decide to take advantage of these all-time low rates, your lender will most likely order an appraisal. What happens if the new appraisal is less than original one? Before you assume the appraiser made a mistake, let’s look at three reasons why a new appraisal could come in low.

The Case File

Three years ago, James Brown purchased a nice three-bedroom home in a quiet town with good schools. The home had been recently renovated and was in great condition. He paid $475,000. The appraisal at that time matched the purchase price.

James wants to do a cash-out refinance and get $15,000 to pay off some other debts. To make that happen, the lender says the appraisal needs to be at least $494,000. James expects it to come in close to $505,000. When the appraisal comes back, however, it was for only $489,000.

James is devastated. The lender suggests that he takes out only $10,000 instead of the $15,000. The appraiser looks like the bad guy. But what could be the cause of the lower than anticipated value?

Reason #1: The Range of Value

The primary reason appraisals differ is because, in reality, real estate appraisals are designed to provide a range of value rather than one set price. A real estate appraisal measures the actions of typical buyers and sellers in the marketplace and rarely do two buyers offer the same exact amount.

Let’s say that Mr. Brown decides to list his home. He lists it for $530,000 and expects to get an offer at $505,000. Within one week, he receives 100 purchase offers. Of those 100 offers, we could expect that approximately 30% would be ridiculously low and 10% would be really high with a slew of ridiculous contingencies. The remaining 60% would be considered reasonable offers. There would be some low cash offers and some high offers with contingencies such as seller paid closing costs or closing delays (i.e. buyer needing to sell their house first); but generally speaking, all the offers should be within 10% of each other. All the reasonable purchase offers created a range of value.

Using our example of Mr. Brown’s house, 60% of the offers would be between $480,000 and $530,000. While every seller would love to get the highest price, nearly all of the high-priced offers will have some sort of contingency that would make the offer less appealing. It is very possible that Mr. Brown may accept an offer of say, $490,000 if the buyer is paying cash and can close within two weeks. That accepted purchase price becomes the “market value” of the property.

An appraisal measures that value range within the report. Hence, Mr. Brown’s most recent appraisal of $489,000 is within that appraisal range of $480,000 to $530,000. It is possible that the appraiser may be willing to adjust the value up to the desired $494,000, since it is also within the range.

Now, here is a word of caution: federal lending requirements and appraisal standards do not allow lenders (or property owners) to “pressure” the appraiser into “hitting” a target number. The lender hired the appraiser as an independent third-party to provide a non-bias estimate of value. The appraiser will decide if the market data can support a change of value, but they cannot be pressured to do so.

Reason #2: Lack of Market Data

Another reason for a difference in appraised value can be caused by a lack of supportable evidence. All appraisers rely heavily on recent sales of properties that are similar to the property being appraised. Most lenders will require that all of the sales used in the appraisal have to be sold within 6 months and be within a limited distance. This can severely limit the data available to the appraiser.

Let’s say that Mr. Brown decided to refinance in the spring after what was a record-breaking terrible winter. When you combined below zero temperatures, tons of snow and COVID-19 it isn’t much of a surprise that there were hardly any sales all winter. The appraiser has to use what few sales are available if he wants the bank to accept the appraisal. This lack of data can, unfortunately, slightly skew the true market value. The appraiser has to balance the requirements and stipulations set by the mortgage market with his ethical requirement to determine a fair market value for the property. In these cases, it is common for the new appraised value to differ slightly from a prior value.

Reason #3: Economic Impact

A third, and less common, reason an appraisal comes in low is due to a change in the economic climate within the market area of the subject property. We have all seen how the national economy affects property values. A change in the local economy can also raise or lower local property values.

For example, let’s say a major employer in the area of Mr. Brown’s home shut down. There was a loss of over 2,500 jobs. Because of the uncertainty of future employment, fewer people are looking to buy homes in the area. In order to encourage buyers, sellers slowly reduce the list price of their homes. This creates lower sale prices than were seen only one year ago. An appraisal must reflect this loss in value – even if it is only temporary.

A homeowner always hope that his property is appreciating in value. A lower appraised value can seem devastating, but before you freak out and assume the worst, consider the possible causes. Look at the range of value contained in the appraisal report. What was the value of the cost approach (usually establishing the high range) and what were the adjusted values of each of the comparable properties (creating the low and mid-ranges)? If your first appraisal is inside that number, then as long as the appraisal can be used by your lender for the refinance, do not fret, the value is still there.

0 Comments/by Boston Appraisal Services

The Hidden Value in Transitional Properties

The backbone of any real estate appraisal is the highest and best use analysis. All properties have a highest and best use – and this is not always the current use. There are four qualifiers that help to determine the highest and best use of a property. The use of a property must be…

Legally Permissible
Physically Possible
Financially Feasible
Most Productive

The goal of the real estate appraiser is to identify the use of the property that will be the absolutely most profitable use within legal, physical and financial boundaries. Property owners are often blinded by the current use of the property, and they fail to see that a change in use could be more profitable. This is where a real estate appraiser can help.

Real estate that has a more valuable future use is called a transitional property. A transitional property may respond to an immediate use change or the most profitable use may come after the passage of some time, as would be the case with a future zoning change.

Traditional properties are true diamonds in the rough. A savvy real estate investor often sees developmental value in grandma’s old farm house when the children only see stinky cows and chipped paint.

When a real estate appraiser is working for an owner/client, they will be able to help the owner to see the true developmental potential of their property to maximize a future sale price. When an appraiser is working for a purchase/developer/client, they can project the actual, or even future, market value of a property after its transition into a new use. This can justify a purchase price or be used as a basis to seek third-party funding for development.

Let’s examine each of these four highest and best use qualifiers to see how they can shift a property from their current use into a more valuable future use.

Legally Permissible

Transitional properties are commonly created when the zoning is changed. Properties that used to be strictly residential may now be approved for multi-family use. Land that was multi-family could be changed to office/service or retail/commercial. Once a new zoning designation is applied to the property, it becomes legally permissible to transition to another use.

In some cases, an existing zoning designation may allow for a change in use. For example, an R2 zoning may allow for two-to-four family dwellings. Could the existing single-family home be converted into a duplex? Could the storage warehouse be converted into a retail store?

In other cases, a change of zoning particular to that property could create a more profitable use. For example, a residential property may be located adjacent to an office/service zoning. It has been determined that the house could be easily converted into an office, so the property owner files with the local zoning authority requesting a change in zoning. Perhaps you have seen real estate offices, attorneys, counselors, or even dentists set up shop in what was clearly someone’s home in the past.

Physically Possible

Before any other qualifier can be analyzed, the legal uses of the property must be established. Once that is determined, the next step is to look at if a change of use is physically possible. In many instances, the existing structure could be converted to a new use. A home could be changed into apartments or an office, a warehouse into light industrial or retail. The changes to an existing building are almost endless – as long as they are physically possible.

Financially Feasible

But in the end, it does really come down to the cost. If it will cost $40,000 to convert a house into a duplex but the market value of the property will only increase $20,000, or in some cases may lower the value, then just because it is legally permissible and physically possible it is not financially feasible and thus not the best use of the property.

Now on the other hand, there comes a time in a property’s life where the structure may create a negative drag on the value. For example, there was this 1,200 square foot quaint turn-of-the-century cottage with 150 feet of frontage on a very beautiful inland lake. The land was selling for $1,000 per front foot. The home had a depreciated value of about $40,000. A buyer would most likely tear down the house, remove any site improvements and start over by building a multi-million-dollar home on the land. The demolition cost was estimated at $35,000. The appraiser estimated that if the property sold with the house, the market value would be $1,465,000 and if vacant, $1,500,000. The owner decided to sell first the house for $10,000 you-haul and then listed the now vacant property for $1,500,000 earning $45,000 more than if he listed the property “As Is” with the house.

Most Productive

The fourth qualifier is establishing all legal uses that would be physically possible and financially feasible the appraiser would need to make sure the use is also the most productive. In other words, what would be the most productive use of the land that would give the highest return.

In some cases, the best use of the land is in its division. This is often the case with smaller parcels of farm land that are just outside a residential area. Development into a subdivision rather than its continued single-family use is usually always more profitable.

In other cases, joining several adjacent smaller parcels together will create a higher value than if purchased individually. For example, an area near a highway was recently rezoned from multi-family to commercial. A developer, seeing the transitional use potential, bought three old run-down rentals all next to each other. After demolishing the buildings and assembling the land into one parcel, he sold the property to a commercial developer for 50% more than what he paid. While each of the three residential lots were originally valued at $15,000, as a commercially zoned larger vacant parcel it had a value of $125,000. A true diamond in the rough.

Transitional properties are what developers live for. There is money to be made if you can see past what is and envision what it could be. Your local appraiser would be more than happy to help you determine what would be the highest and best use if you ever discover one of these hidden gems.

0 Comments/by Boston Appraisal Services

What an Appraisal Report is Really Telling You

Receiving a copy of a residential real estate appraisal report can be a little intimidating. It may seem like a lot of money for such a such a short report. But that is hardly the case. That appraisal report you are holding tells you so much more than a simple property value.

We’re going to examine, in detail, the standard form appraisal report that is most commonly used for residential appraisals. It is called the Uniform Residential Appraisal Report (URAR). This appraisal report can be used for a variety of real estate-related transactions such as a obtaining a mortgage, verifying a purchase price, estate planning, or settling a divorce. While there are other appraisal reporting methods, the URAR is the appraisal you will most likely receive when valuing any single-family residential property.

The Three Valuation Sections of an Appraisal Report

There are three valuation sections of an appraisal report – the cost, sales comparison and income approaches to value. These are contained within the appraisal form, but depending on the property, not every approach to value may be utilized by the appraiser. Let’s look at each of these three real estate valuation sections to see what your appraisal report is really telling you.

The Sales Comparison Approach

The sales comparison approach is designed to compare your property, the subject, with three or more similar properties that have recently sold. The grid below allows an appraiser to compare important features such as the land (called the site), the design or style of the home, the age, condition, rooms and size (called the Gross Living Area). There is also space for the basement, heating and cooling systems, garage, decks and a few lines for non-standard features.

To the right of each comparable you will find monetary adjustments that add or subtract value from the comparable’s sales price. In the above example, your home has 2,862 square feet but comparable #2 only has 2,310 square feet. The appraiser must add the value of the 552 square feet to make the comparable similar to your property. In other words, if the comparable was the same size as your property, what would the buyer have paid for it? That is the concept behind the sales comparison approach.

There is a section after the comparison grid whereby the appraiser will explain his or her reasons for making the adjustments. Then they will take the adjusted sales prices of the comparables and use it to set the value of your property. Sometimes it will be a simple rounded average and other times, one of the comparables are more similar to your property, so the appraiser may place more weight on that value.

In the example show above, it looks like comparable #3 was more similar. Notice that the “Gross Adjustments” were only 4.3% but they were 21.4% for comparable #1. So, let’s say the appraiser decides that comparable #3 is a better indicator of value and places more weight on that value, the appraiser may conclude that the market value of your property is $242,500.

The Cost Approach

The cost approach looks at what it would cost to buy an identical parcel of land and construct an identical home – just like it is right now. The principle behind this approach is that a buyer would not purchase your home if he or she could build an identical home for less.

This approach works well for newly constructed homes, but does not help much if the property is old, antiquated, or suffering from extensive deferred maintenance. This approach may or may not be included in your appraisal report.

In this example, the appraiser determined that the indicated value by the cost approach was $259,050. It is common to have the cost approach be slightly higher than the sales comparison approach, that is unless your home has been built within the last 5 years.

The Income Approach

The income approach is used only if the property is being rented or would be most likely rented by a new buyer. This approach is rarely used with single-family residences. Even if your property is currently being rented, if it is surrounded by owned homes then the appraiser will most likely not consider this approach a good indicator of value. It is common that the income approach value is substantially less than what is indicated in the sales comparison approach.

The Real Estate Appraisal Range of Value

Right below the sales comparison approach, you will find the reconciliation section. This is where the appraiser will determine the property’s value and explain their reasons for their conclusions.

It is most likely that the appraiser will decide that the sales comparison approach is the strongest indicator of the property value. In the bold section at the bottom, the market/appraised value of the property was determined to be $242,500. But, in reality, the appraiser is supplying you with a range of value.

Where is the Appraisal Range of Value?

Even though the appraisal report must conclude with one value number, it is more accurate to say that the appraisal as created a range of value. Notice what the appraisal report has revealed.

How Can I Use the Appraisal Range of Value?

The appraisal contains at least six different values. The combination of these values creates a range of value. Knowing this range can help you to make more informed decisions. For example, if you will be selling your house, the appraisal just told you that the list price should be close to $254,500 and the lowest accepted price should be $240,300. Anywhere in between and you have received the market value for your property. If the appraisal is being used to get a mortgage, the bank is going to use the appraised value ($242,500). If that number is too low for you to finance as much as you would like, the range of value shows you the appraiser’s “wiggle-room.”

In a perfect world the appraised value should come in the middle of the range with there being no more than a 5% difference plus or minus within the range. In this example, the appraised value is less than 1 percent from the low range of value. This could indicate that the appraiser may be justified in raising the value closer to the $244,000 mark. Though remember that comparable #3 was the best indicator of your property value, so the appraiser may decide the value must remain where it is.

The next time you receive a residential real estate appraisal, look beyond the appraised value and see what the appraisal report is really telling you.

6 Comments/by Boston Appraisal Services

What has Been the Impact of COVID-19 on the Real Estate Market?

Welcome to 2020 with COVID-19, social distancing, self-imposed lockdown, and Zoom meetings. Rioting and protesting aside, I have to say that America has dealt with the lifestyle and work environment change quite well. But as life starts a trek back to a new state of normality, it will do us good to take a look at the real estate market and measure the impact of the Corona virus and how it will affect the market in the future.

COVID-19 Impact on the Mortgage Market

One of the positive results of this global pandemic is the affect it has had on the U.S. mortgage market. On March 15, the Federal Reserve lowered the prime rate to zero in response to the corona virus outbreak. This dropped 30-year mortgage rates to the floor – and we are happy to say that it stayed there. As of June 18, 2020, Freddie Mac reported in their Primary Mortgage Market Survey that 30-year fixed rate mortgages are averaging 3.13%. There are some lenders quoting rates as low as 2.75% for top-tier borrowers. This is the lowest rate in 30 years.

These low rates combined with easing of lockdown restrictions are going to drive a dramatic increase in purchase demand. In fact, activity is up over 20% from a year ago. “I think rate levels will be directly tied to the ability of the economy to recover. If it goes better than expected, rates would rise, and vice versa if things remain sluggish. Either way, the Fed is committed to keeping shorter-term rates lower for longer, and that will help to anchor longer-term rates like mortgages to some extent,” said Matthew Graham, chief operating officer at Mortgage News Daily.

What does this mean for borrowers?

Anyone who is in the position to purchase real estate should act now before the next corona virus wave hits. While mortgage rates may inch down a bit more, it will not be a significant shift, so there is no need to wait for rates to drop. On the other hand, if the economy recovers quicker than expected, we could see Feds bring the rates up a bit to slow demand.

COVID-19 Impact on Buyers and Sellers

These low loan rates are pushing buyers to risk virus exposure in search of better housing. This is good news for sellers who have suffered from a stagnate market during the first quarter of 2020. Compared with May of 2019, existing home sales were down 26.6%. This was the lowest level since July, 2010 and is part of a three-month decline in sales. Much of this drop can be attributed to peaks in the pandemic during March and April. The chief economist for the National Association of Realtors (NAR), Lawrence Yun, predicts that “Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

During the height of the pandemic, new home construction ground to a halt. It is hoped that this will start to soon ramp up again to meet the rising housing demand. Without additional new homes coming into the market, home prices will rise too fast and quickly exceed affordability for first-time home buyers – even with the record-low mortgage rates.

Interestingly, the first wave of the pandemic has not lasted long enough to drive down sales prices and create a buyer’s market. The spring is a relatively slow period during a standard annual real estate season. The NAR reports that median sales prices in May increased 2.3% over last year establishing a median price of $284,600.

What does this mean for buyers?

Low mortgage rates mean you can get significantly more home for a much smaller payment. Now may be a good time to go shopping for a new home – especially before the predicted fall/winter second COVID-19 wave begins.

What does this mean for sellers?

We are not expecting price reductions at this time and experts are predicting an above-active summer of activity. Listings that feature virtual tours will have greater appeal to buyers who are nervous about virus exposure. Due to the increasing demand to work from home, home offices will have increased appeal. Families will appreciate private backyards and play areas rather than close proximity to public parks.

COVID-19 Impact on Investors

There has been less of an impact on the commercial real estate sector due to COVID-19. Cushman and Wakefield summed it up well when they said that “it’s premature to draw strong inferences about the virus’s impact on property markets. The commercial real estate sector is not the stock market. It’s slower moving and the leasing fundamentals don’t swing wildly from day to day.” While we are not seeing an impact on prices, rental rates, or investor returns at this point, there are areas that an investor may want to keep on the lookout.

JLL Capital Markets has recently released their COVID-19 Global Real Estate Implications report. As can be imagined, they stated that there will continue to be a high demand for medical office space, regional manufacturing facilities and associated logistics, along with storage space for companies with lean supply chains and low inventory cover. Office space offering a more flexible layout or private offices will have increased demand. If more businesses endorse a more permanent work-at-house outsourcing solution, there could be a period of office downsizing.

In a recent addition to the Immigration Policy, the new order will restrict J-1 (short-term exchange visas), L1 and H1 Visas. A reduction in international students, the ban on skilled workers and issuance of green-cards will pose short-term risk to the demand of housing created by these people.

What does this mean for investors?

With depressingly low government bond yields, real estate continues to offer good risk-adjusted returns in spite of any COVID-19 risk. JLL advises that based on the low interest rate environment; there is a good case for additional portfolio diversification.

Medical experts are saying that COVID-19 is going to be around for longer than we would like. Dealing with it is going to create a new normal, but the real estate market will survive. In spite of the health ramifications, experts in the real estate industry predict a strong recovery and stable prices.

0 Comments/by Boston Appraisal Services

Estate Appraisals in Massachusetts: Everything You Need to Know

When a family member passes away, his or her relatives can be overwhelmed quickly. Not only are they grieving, but they must also take care of the legal obligations and paperwork necessary to settle the deceased’s estate. And because real estate properties are usually the most significant financial asset of the deceased, establishing their fair market value is a priority.

Whether the plan is to sell the property, pass it on to the designated heir(s), or estimate how much obligatory taxes will be paid on the estate, it is important to know the exact worth of the property at the time of the owner’s death. If the estate is going through probate, an accurate inventory of the decedent’s possessions—including any real estate properties—is required.

In any case, the most reliable way to find out the fair market value of a home is to order an estate appraisal, also known as a time-of-death appraisal or probate appraisal. Here is everything to keep in mind regarding this critical element of any estate settlement procedure.

What Is an Estate Appraisal?

After a death, it is often necessary to establish an exhaustive list of the deceased’s possessions, including what is often the most valuable asset: real property. Even if the deceased had a will, a time-of-death appraisal may still be required to settle his or her estate. This unique appraisal type is employed to distribute the estate equitably among the heirs, to plan the estate’s future, and to calculate the estate tax incurred.

If probate is necessary—as is the case when the owner passes away intestate (without a will) or when issues arise regarding the existing will—the court usually demands a detailed inventory of the estate, including the cash value of the decedent’s home as of the date of his or her death.

As such, the executor of the estate or the legal representatives should be prepared to order an estate appraisal promptly. To do so, they need the assistance of a professional real estate appraiser. Licensed real estate appraisers are neutral third parties with no interest in the future sale of the property. They produce objective reports that are defensible in court and will resolve disputes over value that may emerge later.

Understanding the Estate Appraisal Process: A Practical Way to Ease Probate Burdens

In most cases, an estate appraisal assesses the property’s value as of the deceased’s date of death (DoD). The effective date of the appraisal is not the day the appraiser inspected the property (which is usually the case in other forms of appraisal), but prior. This type of appraisal is known as a retroactive appraisal or historical appraisal and is ordered months, or even years, after the property owner passed away. To determine property value, the appraiser needs access to information regarding the property such as retrospective photographs, a detailed list of the improvements made since the decedent passed away, and other supporting documents.

Additionally, the cost of an estate appraisal depends on many factors, including the size and location of the property. Occasionally, any of the following conditions may elevate estate appraisal prices: the retroactive appraisal requires extensive research by the appraiser, the information is not easily accessible, or the effective date is in the distant past.

The appraiser will inspect the property without taking into account the improvements that may have been made after the decedent’s death, and he or she will compare it to properties in a similar condition that sold proximate to the date of death. Although it is not always immediately required (if the property is held in a living trust, for instance), a date-of-death appraisal will likely be needed at some point.

Estate Appraisals and Taxes: The IRS Are Also Involved in Inheritance

When an estate has a transfer of ownership due to death or inheritance, the Internal Revenue Service will demand the homeowner’s relatives provide an appraisal showing the property’s market value. The property is usually appraised as of the deceased owner’s date of the death; however, the IRS may permit an alternate valuation date (AVD), which is up to six months after the date of death of the owner. A time-of-death appraisal is pertinent if the market has declined and the estate has decreased in value over time. Two appraisals are required in this case: one based on DoD and another with an AVD.

If the property is placed in a trust, the IRS will insist on an appraisal after the death of the final grantor, to determine the value of the estate and establish the basis of the property held in trust. The IRS uses the information obtained to confirm whether or not (a) the estate value exceeds the currently enacted exemption amount ($11.4 million for 2019) and (b) the estate is subject to estate tax, commonly known as the ‘death tax.’ The federal tax code allows estates to exclude a portion of value in a tax year—up to a certain threshold—from being subject to estate tax. Estates may also be subject to state taxes, depending on the state of residence of the decedent; these state estate taxes often have a threshold level lower than federal.

Knowledge Is Power: A Summation of the Estate Valuation Process

Overall, estate appraisals are often necessary, mainly because they are essential to facilitating estate settlement and help solve many issues preemptively. When family members are actively mourning, the last thing they need is an insensitive approach to property valuation, which will only further compound their sorrow. To avoid the emotional consequences of drawn-out property valuations, the first step is to create a comprehensive record of the deceased’s assets. Secondly, the heirs, executor, or attorney should order an appraisal. Before doing that, however, they should seek professional help to determine what kind of appraisal they need (typically a retroactive appraisal or historical appraisal). Lastly, it is worth noting that the IRS will get involved at some point; hence, the grieving heirs should prepare for this eventuality. The best way to proceed is for inheritors and their representation to brace for potential litigation and the IRS’s participation by equipping themselves with relevant and timely information on value and the estate settlement process.

If you’ve ordered an estate appraisal before, what are your recommendations for someone currently facing this situation?

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Market Value: An Important Distinction in Appraisal

Real estate appraisals can be used to serve a wide range of purposes: selling, buying, refinancing, or settling an estate. However, the most common goal of an appraisal is to establish the market value of a property. Although the concept of market value (sometimes also called Fair Market Value) is frequently mentioned in the real estate business, it is not always understood. It is type of value opinion among others definitions of value. It is essential to define what market value represents to understand its relevance to an appraisal.

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Valuing Your Income Properties. Is It Time to Execute Your Exit Strategy?

Given the growth of the real estate market and gradual stabilization of values as we approach the top of the market, it’s more important than ever to evaluate the equity position in our portfolios and make educated and informed decisions to keep holding or pursue an exit strategy. Appraisal plays a critical role in the investment process and can lend considerable insight to your approach.

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