A commercial real estate appraisal, or property valuation, is the process of developing an opinion of the value for a piece of real property in question. Real estate transactions often require appraisals both because they often occur infrequently (with values fluxing over time) and because every property is unique, unlike corporate stocks, which are traded daily and are identical. An appraisal management company, or AMC, is an independent entity through which mortgage lenders order appraisals for properties on which they are considering extending loans to property buyers.
AMCs, like your friends at Oxford, fulfill an administrative function in the appraisal process, including selecting an appraiser and delivering the appraisal report to the lender. Individual appraisers who work for AMCs provide the actual property valuation services.
Although appraisals can hypothetically be conducted by several entities – say, the real estate agent who is not educated specifically on property valuation – it is extremely beneficial to pair with an expert AMC when it comes to appraising your piece of property.
When a consumer is purchasing a home, their lending institution will require an appraisal of the house in order to obtain an updated value of the property to be mortgaged. Many lending institutions use an Appraisal Management Company (AMC), like Oxford, to manage the overall process.
The Benefit of Working With an AMC
Federal guidelines now require banks to have a barrier between lenders and appraisers. Most lenders choose to pair up with an appraisal management company, rather than directly hiring an appraiser. To an average consumer, this may seem unnecessarily complicated. Why involve an AMC in the whole shindig?
Well, AMC appraisals add an important layer of oversight to the entire valuation process. After our most recent housing market crash, federal laws regulating lending institutions and mortgages changed and began requiring oversight between lending institutions and appraisers. The law required a firewall between loan production staff and those selecting appraisers and ordering appraisals.
Appraisal management companies have existed for decades, but for the first time their role of adding a buffer between lender and appraisers is now a legally required part of the mortgage process. These AMCs help consumers obtain unbiased reports for financing and loan servicing.
Market Valuation and an AMC-Driven Appraisal
The appraisal report enables appraisers to develop and report an estimate of market value based on three approaches:
Cost Approach to Value
USPAP requires appraisers to develop and report the result of any approach to a property’s market value that is necessary for credible assignment results. For example, when appraising proposed or newly constructed properties, if the appraiser believes the cost approach is necessary for credible assignment results, then the cost approach must be provided. However, appraisals that rely solely on the cost approach as an indicator of market value are not acceptable.
The cost approach to value assumes that a potential purchaser will consider building a substitute property that has the same use as the property being appraised. This approach, then, measures value as a cost of production. It may be appropriate to use the cost approach when appraising new or proposed construction, property that is undergoing renovation, unique property, or property that features functional depreciation, to support the sales comparison approach analysis. The reliability of the cost approach depends on valid reproduction cost estimates, proper depreciation estimates, and accurate site values.
If the appraiser has completed the cost approach, the Underwriter must thoroughly review the information provided to confirm that the appraiser’s analysis and comments for the cost approach to value are consistent with comments and adjustments mentioned elsewhere in the appraisal report.
Sales Comparison Approach
When it comes to the sales comparison approach, the Underwriter must complete the Appraisal Checklist-Conventional (in forms).
Income Approach to Value
The income approach to value assumes that the market value is related to the market rent or income that a property can be expected to earn. The income approach to value is required in the valuation of multi-family properties and may be appropriate in neighborhoods that consist of properties when there is a substantial rental market.
The income approach to value may not be appropriate in areas that consist mostly of owner-occupied properties because adequate rental data does not exist for those areas. However, USPAP requires the appraiser to develop and report the result of any approach to value that is necessary for credible assignment results. If the appraiser believes the income approach is necessary for credible assignment results, then the income approach must be included.
The Appraiser and a Market Valuation
The appraiser who provided the opinion of market value, whether from the initial appraisal report, a subsequent appraisal report, or an appraisal field review report should perform the appraisal update. However, another approved appraiser who is qualified may be assigned to perform the appraisal update. The Underwriter must note in the file why the original appraiser was not used.
If you work with a trusted AMC, however, you can expect “one stop shopping.” At Oxford AMC, we monitor the entire appraisal process from beginning. You will receive automated email updates notifying you of progress. When completed, we will review and certify the appraisal for 100 percent compliance.
From the beginning, Oxford has been committed to three core principles – expertise, service, and independence – and these principles continue to guide the firm today. Want to learn more about how the experts at Oxford could assist in your property appraisal process from beginning to end?