FAQs
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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