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What is an Appraisal?
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. 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.
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. |
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