Historical Properties and Their Unique Appraisal Approaches

Introduction

Appraising historical properties involves a complex interplay of factors, making it a specialized field within real estate valuation. This article provides an insight into the appraisal process of historical properties, emphasizing the role of market data, potential buyers, specialized databases, appraisal methods, and the significant impact of preservation restrictions.

Leveraging Market Data

The appraisal process begins with a thorough analysis of market data, focusing on sales of properties that share historical or antique characteristics. This comparative market analysis extends beyond standard parameters like size and location to include age, architectural style, and historical significance. The scarcity of historical properties often requires appraisers to expand their search to find comparable sales, both geographically and over longer time frames.

Targeting the Most Likely Buyer

The niche market for historical properties typically comprises buyers who value historical preservation and authenticity. Understanding the unique appeal of these properties to such buyers is crucial in accurately determining their market value.

Specialized Databases and Appraisal Methods

The appraisal of historical properties relies heavily on specialized databases. These include:

  1. The National Register of Historic Places: This is the United States’ official list of districts, sites, buildings, structures, and objects deemed worthy of preservation for their historical significance. The National Register is a valuable resource for appraisers, providing detailed information about registered properties, their historical context, and preservation status.
  2. Local Historical Commissions and State Databases: Many localities have their own historical commissions that maintain records of locally significant historical properties. These commissions often have databases that include details on property histories, architectural styles, and any local preservation restrictions. Appraisers also utilize Local Town and State Databases of historical properties. These databases offer comprehensive information on historical properties at the state level, including their historical significance, and any state-level preservation restrictions.

These databases are instrumental in providing appraisers with historical sales data, preservation records, and other relevant information.

Sales of Historical Properties and Value Development

In developing a property’s value, appraisers consider various factors, such as condition, historical significance, renovations, and the extent of preservation of original characteristics. Each property’s unique attributes significantly influence its appraisal.

The Impact of Preservation Restrictions

The distinction between a historic property with preservation restrictions and an old house without them is crucial in the appraisal process. Preservation restrictions, often governed by the National Register or local historical commissions, can add value by ensuring the property’s integrity. However, these restrictions may also limit modifications, potentially affecting the property’s market appeal.

An old house without such restrictions offers more renovation flexibility, which can be appealing to a broader market. However, it may lack the historical significance that often adds value to preserved properties. Appraisal methods for these properties might also include the cost approach (reproduction cost using historical techniques).

The Cost Approach

In many unique cases, especially where there is a lack of comparable sales data, appraisers may resort to the cost approach. This method involves estimating the cost to replicate or replace the property’s historical features using current prices for labor and materials. The cost approach in historical property appraisal is particularly nuanced, often focusing on reproduction costs rather than just renovation costs.

Renovation Cost vs. Reproduction Cost

  • Renovation Cost: This refers to the cost of restoring or repairing existing elements of a property. Renovation costs are typically lower as they involve working with existing structures and materials.
  • Reproduction Cost: For historical properties, especially those with preservation restrictions, reproduction cost is more relevant. Reproduction cost involves estimating the expense to recreate the property in its exact historical form using materials and techniques that match the original as closely as possible. This process can be significantly more costly than renovation due to the specialized labor and materials required to maintain historical accuracy.

Reproduction costs are essential in cases where preservation restrictions mandate that any alterations or repairs strictly adhere to the property’s original style and materials. This approach ensures that the property retains its historical integrity, which is often a key component of its value.

Conclusion

Appraising historical properties requires a blend of historical knowledge, real estate expertise, and an understanding of preservation impact. The process involves not just valuing a piece of real estate but also appreciating the narrative and significance of historical structures. By tapping into resources like the National Register and local historical commissions, appraisers can navigate the complex landscape of historical property appraisal with greater precision and insight. For more information on how Boston Appraisal Services can help, please contact us at orders@bostonappraisal.com or call us at 617-440-7700.

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The Indispensable Role of Real Estate Appraisals in Estate Planning

Real Estate Appraisals for Estate Planning

Estate planning is a complex, multifaceted endeavor that requires the expertise of various professionals, including attorneys, accountants, and financial planners. But often, the role of the real estate appraiser is overlooked. As industry leaders in both residential and commercial real estate valuations, Boston Appraisal Services deeply understands the critical contribution that precise appraisals make in the estate planning matrix. This article aims to delve into how real estate appraisals can assure a balanced and equitable distribution of assets among beneficiaries and heirs, thereby warding off disputes and mitigating conflicts before they arise.

The Significance of Accurate Real Estate Appraisals

Preventing Family Disputes Through Fair Valuation

A crucial benefit of an accurate appraisal is that it sets the stage for an orderly and conflict-free inheritance process, effectively keeping any potential discord at bay. An experienced appraiser operates as an unbiased third party, conducting assessments rooted in market data rather than personal perspectives. By providing an impartial valuation, the appraiser prevents disagreements that may arise from beneficiaries feeling that some assets are undervalued or overvalued.

Equitable Shares: The Importance of Foundational Data

Allocating shares to beneficiaries is far from straightforward. It requires meticulous planning and a detailed understanding of the assets’ worth. An accurate appraisal offers that indispensable foundational data, upon which assets can be split in a manner that is both fair and legally defensible.

Unlocking Tax Benefits

A precise real estate appraisal also plays a significant role in tax planning. Accurate valuations allow beneficiaries to take full advantage of tax exemptions and benefits, such as meeting estate tax thresholds or securing property tax reductions. This maximizes the value of the estate and preserves wealth for future generations.

Liquidity Analysis: Balancing Assets and Obligations

Accurate valuations offer more than just a snapshot of the estate’s worth; they also provide a liquidity analysis. This information is vital for determining whether any assets should be liquidated to cover debts, taxes, or other financial commitments, thereby assisting in effective financial management.

Facilitating Trust Transfers

When assets are being transferred into a trust, precise appraisals are not just helpful; they are legally mandated. These appraisals set the base for future capital gains calculations, thereby making it easier for trustees and beneficiaries to manage assets responsibly.

Steering Long-Term Financial Planning

With an accurate understanding of their inherited assets’ market value, beneficiaries are better positioned to make informed, long-term financial decisions, from investment opportunities to potential divestments.

Appraisal Techniques: The Science Behind Valuation

The appraisal process is far from a one-size-fits-all operation. For residential properties, appraisers commonly employ the Sales Comparison Approach, where the asset in question is compared to similar properties that have recently sold. Commercial properties, on the other hand, often warrant the Income Approach, which takes into account the property’s income-generating potential. Unique or complex properties might even require the appraiser to employ the Cost Approach, which analyzes the replacement or reproduction cost and thereby value, of the property, in addition to its land value.

The Repercussions of Inaccurate Appraisals

Legal Complications and Tax Pitfalls

The stakes of an inaccurate appraisal are high. Not only can it instigate legal disputes among disgruntled beneficiaries, but it can also lead to severe tax consequences, such as penalties and interest, thereby eroding the estate’s value.

Imagine an estate comprising of a diverse range of assets, from residential homes to commercial buildings. In the absence of professional appraisal services, inaccurate valuations can result in protracted legal battles among heirs, unanticipated tax liabilities, and forced asset liquidation. These headaches are easily preventable through the specialized appraisal services like those provided by Boston Appraisal Services.

Choosing an Appraisal Service: Due Diligence Matters

When it comes to selecting an appraisal service, qualifications, experience, and price are paramount. Certified appraisers who hold recognized designations from professional organizations, such as the Appraisal Institute’s MAI or SRA, offer a guarantee of expertise. Additionally, consider their track record in estate planning specifically. Compare fees, but weigh them against the quality and thoroughness of the service provided.

In the intricate world of estate planning, real estate appraisal is not merely an afterthought—it’s a linchpin. Leveraging years of unparalleled experience in residential and commercial real estate valuation, Boston Appraisal Services stands as an industry vanguard. Our services are instrumental in ensuring equitable asset distribution, legal compliance, and maximized tax benefits, thereby laying the groundwork for a smooth, conflict-free transition of wealth.

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How Real Estate Appraisals Empower CPAs: A Short Summary

How Real Estate Appraisals Empower CPAs: A Short Summary

In today’s increasingly complex financial landscape, Certified Public Accountants (CPAs) are the unsung heroes behind successful businesses. Their role is multifaceted, touching upon asset valuation, regulatory compliance, risk management, and more. One essential yet often overlooked component of their job involves real estate appraisals. Here, we delve into some of the key intersections between CPAs and real estate appraisals, incorporating insights from our appraisers.

Asset Valuation

Valuing assets accurately is a cornerstone of a CPA’s responsibilities, whether for financial reporting, business planning, or securing loans and investments. Real estate often comprises a substantial portion of a business’s or individual’s net worth. A professional appraisal, factoring in market trends and depreciation, provides CPAs with a precise property value, crucial for making informed financial decisions.

Risk Management

In the realm of risk management, CPAs use real estate appraisals to evaluate a company’s risk profile comprehensively. The ever-changing nature of real estate markets, influenced by factors such as the recent interest rate hikes by the Federal Reserve, coupled with the uncertainty in commercial spaces, puts additional onus on CPAs to maintain up-to-date portfolio valuations. A professional appraisal, especially one that analyzes current market trends, allows CPAs to manage risks proactively.

Compliance, Reporting and Financial Statements

Regulatory compliance is more complex than it appears. CPAs must ensure financial reporting adheres to guidelines like Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). CPAs incorporate real estate appraisals into annual reports and financial statements. The accuracy of these documents is vital, not just for tax compliance, but also for shareholders, lenders, and regulatory agencies. 

Importantly, dealings with the IRS require Certified Appraisals from Certified Appraisers, especially considering the strict requirements the IRS imposes for reporting and appraisal reports. Automated appraisals, or Automated Valuation Models (AVMs), may not meet these stringent standards, making the need for professional, certified appraisals crucial.

Taxes and Reporting

Taxes are a financial consideration that every business must carefully manage, and CPAs play a crucial role in this regard. When it comes to real estate, the appraisal process significantly impacts how taxes are assessed and reported. 

IRS Requirements and Certified Appraisals

Dealing with the Internal Revenue Service (IRS) often necessitates specific appraisal requirements. The IRS requires a “Certified Appraisal” from a “Certified Appraiser” for many transactions, including charitable contributions of property, estate settlements, or gifting assets. These certified appraisals must meet the agency’s strict criteria and specifications, thereby ensuring that the appraisal is both accurate and legally defensible. CPAs must be diligent in ensuring that all real estate appraisals involved in tax-related transactions meet these stringent IRS conditions.

Estate Planning, Probate, and Litigation

Real estate appraisals are also indispensable in estate planning and probate scenarios. Accurate appraisals can impact estate tax liabilities and aid in equitable asset distribution among beneficiaries. During litigation—such as divorce settlements, partnership dissolutions, or disputes related to property—an accurate appraisal can be a decisive factor.

Capital Gains and Losses

In addition to property taxes and estate considerations, CPAs also have to account for capital gains and losses when a property is sold. An accurate appraisal establishes the fair market value of the property, essential for calculating the capital gains or losses that must be reported to tax authorities.

Corporate Transfers

Mergers, acquisitions, and other forms of corporate restructuring often entail asset transfers, including real estate. In such cases, CPAs can use real estate appraisals for accurate pricing, enabling smoother negotiations and fair transactions. The appraisal’s integrity is especially important, where an undervaluation or overvaluation could significantly impact the outcome.

Choosing the right appraisal service is crucial for CPAs. Attributes like accuracy, current market trend analysis, zoning analysis, and both prospective and retrospective analyses are vital. Boston Appraisal Services provide all these analyses in their comprehensive reports. Their expertise helps CPAs navigate the complexities of asset valuation, compliance, risk management, and more, particularly in a world influenced by emerging trends like market downturns and regulatory changes. Armed with this revised understanding, it becomes clear that real estate appraisals are more than just a complementary service for CPAs—they’re a necessity.

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When to Apply Extraordinary and Hypothetical Assumptions

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.

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Gross Living Area Discrepancies with Public Data May Differ and How They Occur

Gross Living Area Discrepancies with Public Data May Differ and How They Occur

Appraisers are often tasked with providing valuations for properties that can be very different from one another. From one house to the next, things can and often do change. Everything from the number of bedrooms to the quality of the construction. However, in order to provide credible valuations, appraisers often have to find an objective basis for comparison. More often than not, square footage and size become the units of comparison.

However, simple square footage counts are not used. Appraisers use a unit of comparison known as the GLA, which stands for Gross Living Area. The Gross Living Area is used as a standard measure for the size of a dwelling. It is used in real estate appraisals to determine the value of a property. To calculate GLA, the square footage of all floors of the dwelling is measured and included, excluding basements and unfinished attics. The GLA measurement is used to compare properties and to determine the value of a property based on its size. It is important to accurately measure the GLA of a property, as it can significantly affect the value of the property.

The gross living area is typically defined as the finished and heated space in a residential building that is easily accessible and meets certain requirements for heating and ceiling height. These requirements vary depending on local building codes and regulations but typically include a traditional heating system and a minimum ceiling height of 7 feet. This is because construction rules frequently require at least a 7-foot ceiling height for spaces to be considered usable and livable. This is due to the fact that low ceilings can make a place feel tight and uncomfortable, as well as pose a safety hazard if they are too low for people to stand upright in.

Determining the gross living area (GLA) of a property can be a crucial factor in its evaluation and, ultimately, its value. There are several sources that can be used to determine the GLA of a property, such as public records, assessors, and plans or specifications. However, these sources may not always provide an accurate representation of the property’s true GLA for a variety of reasons. One reason is that the information contained in these sources may be out of date or inaccurate. For example, public records may not reflect any renovations or additions that have been made to the property since the records were created. Similarly, assessors may not have access to the most up-to-date information about the property.

Additionally, other sources, such as plans, or specifications, may not always be complete or detailed enough to accurately reflect the property’s true GLA. Public records often do not include information about finished basements or bonus rooms that are part of the GLA, and plans or specifications may not include all of the details needed to accurately measure the spaces. Overall, it is important to verify the accuracy of any information about a property’s GLA, and to use multiple sources of information, if possible, to get a complete and accurate picture of the property’s true GLA. This is where a professional appraisal inspector comes in.

In most cases, the process of obtaining the GLA requires appraisers to inspect and measure a subject property. This is done through a thorough and meticulous process, where the inspector will use specialized tools and techniques to measure every room, hallway, and other living space within the property. These inspections and measurements must conform to the standards and guidelines of the American National Standards Institute, also known as ANSI. ANSI guidelines, specifically, the Square Footage-Method (ANSI Z765-2021), provide appraisers with a standard for measuring, calculating, and reporting above and below-grade square footage(s) to determine the gross living area (GLA) and non-GLA areas of subject properties. This creates alignment across market participants, allows transparent and repeatable results for the user of the appraisal report, and provides a professional and defensible method for the appraiser. ANSI guidelines also provide standards for the design and construction of supplementary units installed in a single-family home, such as an in-law/accessory unit or finished attic spaces. A small, independent living area constructed on the same property as a single-family home is referred to as an accessory unit. It is also known as a secondary unit or in-law unit. Usually smaller than the main house, accessory units serve a variety of functions, such as giving family members or tenants extra living space.

An in-law unit is a separate living space that is typically located on the same property as a single-family home. In-law units can be used for a variety of purposes, such as providing a place for an aging parent or adult child to live, or as a rental property. In many cases, an in-law unit is not considered part of the gross living area (GLA) of a home because it is a separate, self-contained living space. The GLA of a home generally refers to the total square footage of all of the habitable and livable space within a home, including the main living areas, bedrooms, and bathrooms. Because an in-law unit is a separate space with its own kitchen, bathroom, and living areas, it is often considered a separate entity from the main home and is not included in the GLA calculation. The appraiser would take these factors into consideration when determining the value of the in-law unit, and this value would be reflected in the overall appraisal of the property.

These considerations and issues are important and necessary for the appraiser to verify. As stated above, it is during the physical inspection of the property that the appraiser collects the information needed to determine GLA. But a physical inspection also allows the appraiser to gather other detailed information about the property, such as its condition. This is important because the value of a property can be significantly affected by its condition, age, and features. By inspecting the property in person, the appraiser can see firsthand any issues or problems that may affect the value of the property.

Second, a physical inspection allows the appraiser to verify the accuracy of the information that has been provided about the property. For example, if the property is described as having a certain number of bedrooms, bathrooms, and square footage, the appraiser can verify this information by measuring the rooms and taking other physical measurements of the property. This helps to ensure that the appraisal is based on accurate and reliable information.

Finally, a physical inspection allows the appraiser to get a better understanding of the property’s location and surroundings. The appraiser can assess the quality of the neighborhood, the proximity of amenities and public transportation, and other factors that may affect the value of the property.

Conversely, it should be noted that while all appraisers follow the same guidelines and standards when inspecting a property (such as ANSI) and determining GLA square footage, the same is not true for assessors or real estate agents. Information about in-law units is typically not properly disclosed in public records and leads to discrepancies. Real estate agents may not be following the same guidelines when measuring finished areas in basements or attics. Appraisers and appraisals, however, have physical inspections and ANSI standards that are used to verify what is being reported.

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Hybrid Appraisals and the Associated Risks

Hybrid Appraisals and the Associated Risks

In recent years, it has become common for lenders to obtain hybrid appraisals. While appraisers provide an essential service through their reports, this work comes at high costs to the buyer or borrower. This cost can be measured in terms of dollars spent on an appraisal or the time required to produce a full appraisal report. As a result, delays in the lending or mortgage process are not uncommon; more recently, there have been attempts to mitigate this problem. One such attempt is the increased use of hybrid appraisals.

Hybrid appraisals and full appraisals differ in one key aspect, property inspection. In the course of a full appraisal, the appraiser will schedule and inspect the property themselves. The appraiser obtains all relevant property characteristics and data such as measurements, room counts, condition, and quality, and utilizes this information in the report. This process has been the foundation of the appraisal process.

For hybrid appraisals, the property inspection is completed by a third party, and that information is relayed to the appraiser. A non-appraiser or contractor usually completes the third-party assessment at a fraction of the cost.

As part of their inspection, the third-party individual will take pictures of the property and provide these images to the appraiser. It’s meant to be a shorter and less expensive process when compared to a traditional appraisal since the appraiser doesn’t need to visit the property in question. This article will examine the associated risks of hybrid appraisal products and why one might want to avoid them.

What Are Hybrid Appraisals?

Also known as bifurcated appraisals, hybrid appraisals employ a more streamlined appraisal approach that involves separating the valuation aspect of an assessment from the property inspection portion.

As mentioned above, a third-party contractor is charged with inspecting the home, taking images, and writing down important property details. The individual performing the inspection will then complete a property description report and provide all their findings to an appraiser. Finally, the appraiser is tasked with completing the valuation, which they typically do by utilizing data from MLS and other public records.

For the inspection portion, many of the same details are recorded by the third-party contractor, in much the same way an appraiser records them. For example, the third-party contractor collects attributes such as the home’s size, appearance, and square footage. This information is then provided to the appraiser.

In many aspects, a hybrid appraisal is similar to a traditional full appraisal. The appraiser completing the valuation is still charged with determining the scope of work, the highest and best use of the property, and employing the three approaches to value. When reviewing a hybrid appraisal, the valuation portion often is similar to a full inspection.

The process of a full appraisal begins with research being conducted by the appraiser before the full property inspection. The appraiser will gather market and neighborhood data, and verify trends and possible relevant statistics in the course of his appraisal report. Once this information is collected, the appraiser will schedule a property inspection.

During an appraisal inspection, the appraiser will measure the property, make a note of the total number of bathrooms and bedrooms, identify the property’s condition and amenities, and take pictures. The appraiser will then verify comparable sales and their locations about the subject property. All this information is then utilized in the second stage of the appraisal process.

Once the home inspection has been performed, the appraiser begins producing a valuation using the Uniform Residential Appraisal Report. This report consists of a sketch of the property alongside a street map that labels the comparable homes. All pertinent home details will be listed in the information with accompanying images. The report will then delve into the three approaches to value, the Sales Comparison Approach, the Income Approach, and the Cost Approach.

The appraiser’s information is the same whether they perform a hybrid or a traditional appraisal. However, if a third-party contractor is hired for the job, he or she could make mistakes that lead to a less accurate appraisal.

What Are Hybrid Appraisals?

The Risk of Hybrid Appraisals

Hybrid appraisals are designed to make the appraisal process considerably more cost and time efficient. The main issue with hybrid appraisals is the third-party contractor. The appraiser is not responsible for engaging the contractor to complete the inspection. Typically, the third-party contractor is hired by the lender or the lender’s appraisal management company. The appraiser has no say nor control over this process.

The contractor may gather details about the home without knowing exactly what to look for. They are only tasked to fill out a property description form and don’t necessarily ask relevant questions or follow up on issues like an appraiser might. It’s possible for every hybrid appraisal product to differ from the rest. Companies that offer hybrid appraisal products can have their forms and inspection methods, increasing the risk the lender must take on.

This problem is compounded because some third-party contractors are only required to take images of the property instead of performing a full inspection. The gathering and verification of property data is still left to the appraiser, but this time without the inspection.

Furthermore, the contractor isn’t always someone who’s familiar with the appraisal process. They are not required to complete any appraisal education, nor are they trained in the same manner an appraiser is. Additionally, the contractor does not assume any responsibility for verifying the data they collect in their inspections and is ultimately not liable for the hybrid appraisal. The appraiser, in contrast, must complete the final hybrid appraisal and assume the risk of certifying information that might prove inaccurate.

Even though the appraiser doesn’t perform the first stage of the process, they are asked to determine a property’s fair market value without being allowed to conduct first-party research. Questions of legality or square footage verification are still left to the appraiser. And this proves difficult for the appraiser to resolve down the line because they did not inspect the property.

Likely the most notable concern associated with hybrid appraisal products is the level of liability and risk. The risk in this process is not limited only to appraisers. Lenders run the risk of lending on loans where information may not be accurate, underwriters might not be made aware of legal issues to do with the property, and ultimately, borrowers and buyers are at risk of making decisions based on erroneous valuations.

To improve accuracy while also improving efficiency and turn times, lenders could allow the inspection to be performed by an appraiser trainee. However, current lender requirements limit how much an appraiser trainee can contribute. The most frequent restriction is the property inspection; some lenders only allow the appraiser to inspect and do not allow trainees. However, this very same requirement is waived by hybrid appraisals and third-party contractors.

Trainees are required to complete extensive appraisal education and field training. Furthermore, a trainee appraiser is required to obtain a trainee license, which verifies their aptitude and appraisal education. Therefore, a property inspection completed by a trainee will lead to a considerably more accurate result.

During a full appraisal, anything that would receive value in the home would be under the purview of the appraiser. The appraiser then performs every facet of the appraisal process with all the relevant data being considered. An appraisal trainee, who possesses the training and skills, provides the same level of accuracy regarding property inspection. In this scenario, the lender could be more confident that the final estimate of the home’s value is accurate.

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