is an Appraisal:
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.
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.
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.
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.
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.
The appraiser 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.
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.
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.
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.
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
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.
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.