The term appraisal refers to the act of assessing someone, or something of value. Valuations of property are normally done by qualified, impartial professionals, and are commonly associated with the valuation of real property, though valuable personal property is also the subject of appraisal. The value provided as a result of an appraisal may be based directly on commercial value, such as in a real estate transaction, or on the opinion of the expert, such as the valuation of a liability. To explore this concept, consider the following appraisal definition.
Definition of Appraisal
- The act of assessing someone, or someone’s performance
- The act of judging the nature of something, or assessing something’s value
- An estimate, whether written or verbal, of the value of something
1810-1820 Middle English appraysen
A home appraisal is done to provide expert opinion on the condition and value of a home. The scope of such an appraisal is determined by the person or entity hiring the individual doing the appraisal, called an “appraiser.” A home or real estate appraisal is done for the purpose of providing certain information to the client, which depends on the decision that the client must make based on the information. For instance, an assessment of value might be the investment value, the market value, the insurable value, or any other type of value.
A home appraisal may be needed in a variety of situations, such as:
- Transfer of ownership – to determine fair market value and set an asking or offering price
- Financing or credit – to establish the value of the property as collateral
- Taxes – to estimate the assessed value, or to determine inheritance or gift tax amounts
- Litigation – to estimate the market value of a property that is subject to the lawsuit, or to establish its value as payment for damages
Difference Between a Home Appraisal and a Home Inspection
Both appraisals and inspections play vital roles in the home-buying process, though their purposes are different. A home inspection is done to ensure the buyer is advised of any serious structural problems with the home and property. This looks at physical attributes like the foundation, the roof, the insulation, the plumbing, electrical wiring, heating and cooling systems, and major appliances for defects. A home inspector should look for potential health hazards as well, such as mold, insect or rodent infestations, asbestos, and other issues.
A home appraisal is done to determine the fair market value of the property. This is based on the home’s condition, the size and condition of the property, the property’s location, and other issues. It is also based on the recent sale prices of similar properties in the same vicinity. The result of an appraisal helps a lender determine how much it is willing to lend on the home, how much to require as a down payment, and other loan details.
Example of Appraisal vs. Inspection
Mike and Melissa are buying their first home together. Being new to the homebuying process, the terminology was somewhat confusing, leaving the couple unsure of whether they needed an inspection in addition to the appraisal ordered by the mortgage company. While the bank sent out an appraiser to inspect the property and offer an opinion as to its value, Mike and Melissa’s real estate agent recommended they hire an inspector to advise them on the actual physical condition of the home.
Although the appraisal placed the property’s value at $182,000, about $5,000 above asking price, the home inspection reported substantial damage to the foundation of the home, as well as termite damage. Even though the bank was willing to issue a loan on the property, the couple decided the extra expense and hassle of repairing so much damage was simply not worth it. In this example of appraisal and inspection, and because the couple understood the difference between the two, they decided to back out and keep looking.
Hiring a Home Appraisal Expert
Qualified home appraisal experts have a formal education in the theory, principles, ethics, and procedures of the appraisal process, and keep their knowledge current as to the latest appraisal standards through continuing education and testing. It is important to hire an appraiser that is familiar with the type of property that is to be appraised, as well as the local market, and a host of other important issues.
As hiring a qualified appraiser is important, there are certain questions that should be asked during the selection process:
- Do you belong to an appraisal association that tests its members? Membership in a professional organization shows that the appraiser is actively involved in his profession, has access to peer knowledge, and to updated information. In addition, members are subject to a code of ethics and conduct.
- Have you been tested, and do you take continuing education classes? Even if the appraiser belongs to a professional group that tests its members, some “grandfather” in members without testing them. Ask the appraiser if he has personally gone through the training and been tested. Also, because regulations and standards are constantly changing, it is important to learn whether the appraiser participates in regular continuing education courses that include testing.
- In what format will your appraisal report be delivered? Every professional appraisal should be delivered in a formal, written report that gives specific information in an organized, easy-to-understand fashion. Ideally, the appraiser will have been trained in writing standardized, comprehensive reports.
- What is your fee, and how is it charged? A qualified appraiser should charge a flat rate, per item, or hourly fee. Appraisers who charge a percentage of the appraised value clearly have a conflict of interest. Because valuations done on a contingent or percentage basis are likely to result in inflated values, the IRS, and many insurance companies, will not accept such appraisals.
Real Estate Tax Appraisal
The appraised value of a home or property during the buying process often differs substantially from the value of the property for tax purposes. A real estate tax appraisal determines the value of a property according to the taxing authority in the county in which the property sits. These values are often determined by the average selling prices of other properties in the area, and are not as up-to-date as market prices. Also, many counties set their taxable values at a percentage of the actual property value, so the property “value” seen on a tax statement is often quite a bit lower than the property’s actual value.
A performance appraisal is used to evaluate an employee’s skills, achievements, growth, and overall value to the company. Also referred as a “performance review,” or “performance evaluation,” is a tool used to rate job performance for the purpose of hiring and firing, employee advancement, productivity, and even career development.
A systematic performance appraisal done on a regular basis helps employers:
- Maintain records for the purpose of determining wage and salary structures, raises, and compensation packages
- Identify and assess strengths and weakness of employees
- Provide useful feedback to employees regarding their job performance
- Improve the working habits of struggling employees
- Guide training and promotions
Performance Appraisal Process
Performance appraisals are a systematic approach to improving job performance, productivity, and employee satisfaction. The performance appraisal process should follow some basic steps, from creation and implementation of the appraisal, to making use of the information gathered. When instituting a performance appraisal process, company management should:
- Define the objectives of employee appraisals
- Establish concrete job expectations for each position
- Design the appraisal program, specifying who will do the evaluations, and how often evaluations will be performed
- Perform employee interviews
- Appraise each employee’s performance based on quantifiable data
- Use the information obtained for appropriate purposes, such as instituting needed training, determining which employees are eligible for promotion, or determining which employees should be laid off
Lawsuit for Fraudulent Appraisal Example
Misrepresentation of a property’s value is one of the most common reasons for civil lawsuits against real estate appraisers. Professional appraisers are expected to follow uniform standards when appraising properties. An example of appraisal fraud is found in a 2013 civil lawsuit in the state of Illinois. In 2007, Boris Masarsky and Linda Surges, both real estate appraisers, were hired by Investment Mortgage Group, a real estate broker, to appraise a property for mortgage lending purposes.
Colonial Bank, relying on the appraised values provided by both Masarsky and Surges issued a loan secured by the property. When the borrower defaulted on the loan, the bank discovered that the appraisal reports submitted on the property left out important information on the property’s completion status, and used comparable sales that were not comparable at all. The misrepresentations of the appraisers resulted in an appraised value that was higher than the property’s actual value, leaving the loan severely under-secured.
After Colonial Bank was closed in 2009, the Federal Deposit Insurance Corporation (“FDIC”) had been appointed its receiver. The FDIC filed a civil lawsuit against Masarsky and Surges, claiming that, had the true value of the property been reported, the bank would not have made the loan in the first place. The complaint alleged that the appraisers failed to follow official guidelines and industry standards in performing the appraisal, and that they negligently, if not fraudulently, misrepresented the property’s value.
Certifications made by the defendants as to the appraisal reports stated they performed the appraisals in accordance with the Uniform Standards of Professional Appraisal Practice, that they had completed visual inspections of both the interior and exterior areas of the property, and that they had reported the conditions factually and specifically. The defendants had each certified that they had reported any deficiencies in the property that could affect the structural integrity, soundness, or livability of the property. Further, the defendants had certified that they had used comparable sales that were the most similar to the property in location, physicality, and functionality, and they guaranteed the accuracy of the appraisals.
When defendants attempted to have the lawsuit dismissed, claiming they had no contract with the FDIC, and that the FDIC had no grounds for the lawsuit, the federal judge felt differently. In this example of appraisal fraud, the defendants’ motions to dismiss the case were denied, the judge ruling that the defendants’ own certifications ensured that the deficiencies in their reports subjected them to the lawsuit.
Related Legal Terms and Issues
- Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
- Collateral – Something of value pledged as security for repayment of a loan.
- Fair Market Value – An estimate of market value of a property based on what a knowledgeable and willing buyer is likely to pay to a knowledgeable and willing seller in that market.
- Litigation – The process of taking legal action; the process of suing someone, or trying them for a criminal act.
- Personal Property – Any item that is moveable and not fixed to real property.
- Real Property – Land and property attached or fixed directly to the land, including buildings and structures.