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Appraisals

What is an appraisal?

A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence or a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to complete the transaction. The same holds true for commercial real estate property.

Realtor – negotiates the sale of the transaction
Mortgage Company – provides the financial capital necessary to fund the transaction
Title Company - ensures all aspects of the transaction are completed and that a clear title passes from the seller to the buyer

A real estate transaction cannot 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 the property.

Appraisal Process

Inspection

The appraiser's duty is to inspect the property to ascertain the true status of the property.
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 the real property: a cost approach, a sales comparison and, in the case of 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? Although there may be mitigating factors, such as location and amenities, these are not usually reflected in the cost approach.

Sales Comparison

Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers are knowledgeable about the communities and neighborhoods in which they work. They know the traffic patterns, school zones, and busy thoroughfares. They use this information to determine which attributes of a property will make a difference in the value. The appraiser researches recent sales in the vicinity and finds properties which are "comparable" to the subject property being appraised. The sales prices of these prices are used 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.

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

The appraiser is now ready to compile all data from all approaches to prepare the final appraisal document. Appraisals are typically done in writing, although in certain circumstances, an appraiser may also provide an oral appraisal. It is important to note that while the amount is probably the best indication of what a property is worth, it may not be the final sales price. Certain factors such as seller motivation, urgency or "bidding wars" may adjust the final price up or down. 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. An appraiser's professional opinion of value will help you get the most accurate property value, so you can make the most informed real estate decision.


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