An appraisal of your home is usually made by a neutral, independent professional to determine a fair market price of your home based on sales of similar properties within the past three months, or sometimes past six months if there are fewer sales in a very close geographic area.
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The appraiser uses adjustments for three sold properties and three properties on the market. The adjustments may be for square foot, lot size, location desirability, condition, age and time (when a market is increasing or declining).
Market value is needed to meet mortgage lending guidelines, particularly when there is a loan-to-value criteria. Appraisals are also important when there is a buyout between partners, when partners go separate ways and when net worth must be determined as a benchmark to estimate estate tax or other taxes.
1. Selling your home: Before going on the market, a wise thing to do (at minimum) is an unofficial appraisal known as a comparative market analysis or CMA. The CMA uses much less detailed comparable sales. When the price is extremely high and the value may be difficult to accurately determine, it may be worth paying up to $2,000 to a licensed fee appraiser for a full appraisal.
2. Obtaining financing: The appraisal is the benchmark for a cushion of equity to be determined. Whether you are obtaining a first mortgage, refinancing, taking a line of credit or taking a reverse mortgage, your lender has a responsibility to investors, stockholders and depositors to only loan an amount that is secured by a value high enough to provide a comfortable spread of equity. This also assures the borrowers have the motivation to not default.
3. Divorce or dissolving partnership: At times when a business partnership is dissolved, or when a marriage partnership is dissolved, a property or business does not go to the open market to be considered or offered publicly. Instead, one partner may buy out the other partner. That buyout may have many moving parts; however, the analysis usually originates with the need for an appraisal to determine the arm's length market value.
4. Estate purposes: When a property is left to successor trustees or left in probate, the value of the disinherited property must be determined to figure the inheritance tax, if any, and to determine the division of assets if they are not sold on an open market. The count will need values of any asset completely documented.
5. Insurance claims, policies and litigation: Before an insurance company writes a check to settle a claim, it requires an appraisal. As an example, in the case of a fire, the insurance company will want to determine not only the property value but also the value of the land, which will be deducted from the full property value before making any other calculations.
6. Bankruptcy (filing Chapter 7 or Chapter 11): When someone is attempting to prove that they need assistance to restructure, they are making a claim that they have tapped all available resources to pay off debts and creditors. In order to qualify for restructure, a careful appraisal of all assets must be conducted to determine where, if anywhere, there is an equity position to be used to pay down accumulated debt.
7. Estate planning and retirement planning: In order to properly and adequately plan how to allocate assets in a will or a trust, one must have a clear idea of what every asset in the estate is worth. To determine the value, an appraisal would be necessary.
8. Trading equities: At times, an equity exchange is conducted. It could be a real estate 1031 exchange, or it could simply be one person trading certain assets to another person. These assets could be all real estate, or not. They could even be the equity in my home traded for a yacht or a valuable piece of art. Regardless, you would start by having an appraisal.
9. Determining net worth or to prepare a financial statement: In order to prepare a financial statement, one would need an accurate list of assets, each with an appraised value and a list of liabilities, such as loans.
10. Qualifying for a special government program or low-income, low-net wealth package: These special offerings assist people with exceptionally low resources, low equities and low income. To qualify, one would need to either donate portions of their estate or provide verification that their assets do not exceed the maximum threshold. An appraisal is necessary to prove you are qualified.
Ron Wynn has been among the top 100 agents in America for over 10 years, as noted on REAL Trends/Wall Street Journal. Ron has represented over 2,200 sales totaling over $1.5 billion in sales volume in his 30-plus-year career as a real estate broker in California.