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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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