What is an Appraisal?Purchasing a home is the largest 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 usually involves multiple parties.
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.
There are too many people involved 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 receives) 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 is one of the most vital parts of the appraisal process. An appraiser's duty is to inspect the property being appraised to ascertain the true attributes of that property. The appraiser examines features, such as the number of bedrooms, bathrooms, the location, and so on, and determines whether or not the condition of the home is as a buyer would expect it 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, the 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 easy to understand. The appraiser uses information on local land value estimates, dwelling depriciation factors, 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.
In most appraisals, the Sales Comparison approach is the most reliable approach in determining market value. Our appraisers 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, school zones, busy throughways; and they use this information to determine which attributes of a property will make a difference in the market 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.
With combined knowledge of the value of certain items such as square footage, extra bathrooms, car storage, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties sale price 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 would add a certain dollar 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. Our appraisers strive to provide the most "up to date" data in regards to monthly rent prices. Many times, our research of an area involves talking to landlords, property managers, owners, etc.
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 than 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.