What is an Appraisal?
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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