What is an
appraisal
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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 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
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. He or she 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 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. |
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