What Is An Appraisal?
An appraisal is an unbiased estimate of what a buyer might expect to pay 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, professional appraiser to provide the most accurate estimate of the value of their property.
An appraisal begins with the walk-through. An appraiser’s duty is to inspect the property in question to determine the true status of that property. The appraiser must actually view amenities and features, such as the number of bedrooms, bathrooms, etc., to ensure that they exist and are in reasonable condition for the market. The walk-through 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 final value.
Once the site has been inspected, an appraiser uses two or three approaches to determine 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.
Appraisers need 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. The appraiser then 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 foundation to begin the sales comparison approach.
Using knowledge of the value of certain items such as square footage, extra bathrooms, fireplaces or other amenities, 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 such as rental homes, the appraiser may use a third approach to value 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.
Determining The Final Value
Combining information from all approaches, the appraiser is ready to assign 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 affect the final price. However, 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.