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
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.
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.
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.
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