What
is an appraisal?
A
home purchase is the largest, single investment most people
will ever make. Whether it's a primary residence, a second
vacation home or an investment, the purchase of real property
is a complex financial transaction that requires multiple
parties to pull it all off.
Most of the
people involved are very familiar. The Realtor is the most
common face of the transaction. The mortgage company provides
the financial capital necessary to fund the transaction.
The title company ensures that all aspects of the transaction
are completed and that a clear title passes from the seller
to the buyer.
So who makes
sure the value of the property is in line with the amount
being paid? There are too many people exposed in the real
estate process to let such a transaction proceed without
ensuring that the value of the property is commensurate
with the amount being paid.
This is where
the appraisal comes in. An appraisal is an unbiased estimate
of what a buyer might expect to pay - or a seller receive
- for a parcel of real estate, where both buyer and seller
are informed parties. To be an informed party, most people
turn to a licensed, certified, professional appraiser to
provide them with the most accurate estimate of the true
value of their property.
The
Inspection
So what goes into a real estate appraisal? It all starts
with the inspection. An appraiser's duty is to inspect the
property being appraised to ascertain the true status of
that property. He or sho must actually see features, such
as the number of bedrooms, bathrooms, the location, and
so on, to ensure that they really exist and are in the condition
a reasonable buyer would expect them to be. The inspection
often includes a sketch of the property, ensuring the proper
square footage and conveying the layout of the property.
Most importantly, the appraiser looks for any obvious features
- or defects - that would affect the value of the house.
Once the site
has been inspected, an appraiser uses two or three approaches
to determining the value of real property: a cost approach,
a sales comparison and, in the case of a rental property,
an income approach.
Cost
Approach
The cost approach is the easiest to understand. The appraiser
uses information on local building costs, labor rates and
other factors to determine how much it would cost to construct
a property similar to the one being appraised. This value
often sets the upper limit on what a property would sell
for. Why would you pay more for an existing property if
you could spend less and build a brand new home instead?
While there may be mitigating factors, such as location
and amenities, these are usually not reflected in the cost
approach.
Sales Comparison
Instead, appraisers rely on the sales comparison approach
to value these types of items. Appraisers get to know the
neighborhoods in which they work. They understand the value
of certain features to the residents of that area. They
know the traffic patterns, the school zones, the busy throughways;
and they use this information to determine which attributes
of a property will make a difference in the value. Then,
the appraiser researches recent sales in the vicinity and
finds properties which are ''comparable'' to the subject
being appraised. The sales prices of these properties are
used as a basis to begin the sales comparison approach.
Using knowledge
of the value of certain items such as square footage, extra
bathrooms, hardwood floors, fireplaces or view lots (just
to name a few), the appraiser adjusts the comparable properties
to more accurately portray the subject property. For example,
if the comparable property has a fireplace and the subject
does not, the appraiser may deduct the value of a fireplace
from the sales price of the comparable home. If the subject
property has an extra half-bathroom and the comparable does
not, the appraiser might add a certain amount to the comparable
property.
In the case
of income producing properties - rental houses for example
- the appraiser may use a third approach to valuing the
property. In this case, the amount of income the property
produces is used to arrive at the current value of those
revenues over the foreseeable future.
Reconciliation
Combining information from all approaches, the appraiser
is then ready to stipulate an estimated market value for
the subject property. It is important to note that while
this amount is probably the best indication of what a property
is worth, it may not be the final sales price. There are
always mitigating factors such as seller motivation, urgency
or ''bidding wars'' that may adjust the final price up or
down. But the appraised value is often used as a guideline
for lenders who don't want to loan a buyer more money that
the property is actually worth. The bottom line is: an appraiser
will help you get the most accurate property value, so you
can make the most informed real estate decisions.
