What is an Appraisal?
Financing real estate almost always requires an appraisal, an unbiased estimate of what a buyer might expect to pay-or a seller might expect to receive-for a real estate property.
During a property sale, everyone should-and most everyone does-turn to a licensed, certified, professional appraiser to provide an accurate estimated value of the property. So what goes into a real estate appraisal?
The Appraisal Inspection
It’s the appraiser’s job to ensure certain features actually exist and what condition they are in. The appraiser will look at things like the number of bedrooms and bathrooms, unique features, roof and foundation conditions and recent renovations. He or she will sketch the building in order to calculate the actual square footage as well as to convey the overall layout of the property.
Most importantly, the appraiser looks for any obvious features or defects that can affect the value of the house. The appraiser will also take photographs to document the condition of the property. Keep in mind an appraisal inspection is different from a home inspection.
Once the appraiser has inspected the site, he or she can use two or three different approaches to determine the property’s value.
The Cost Approach
Appraisers use information such as local building costs, labor rates and other similar factors. However, most appraisals rely heavily on the Sales Comparison Approach.
The Sales Comparison Approach
Appraisers rely on the sales comparison approach to value factors like location and amenities. It’s the appraiser’s job to understand the neighborhoods in which they work and are tasked with understanding the value of certain features to local residents. They understand factors like local traffic patterns, proximity to noisy highways or commercial real estate, and they use this information to further evaluate a property’s value.
Next, the appraiser researches recent sales in the local area to find comparable properties. The selling prices of these properties are used as a basis to figure out the value of the property being appraised, also known as the subject property. Then the appraiser compares and contrasts what the subject property and the comparable properties have to offer.
Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces, view lots, swimming pools, etc., the appraiser adjusts the value of comparable properties to more accurately portray the property being appraised. For example, if the comparable properties have a fireplace and the subject does not, the appraiser will adjust the value accordingly.
The Income Approach
In the case of income-producing properties, like rental houses, the appraiser may use an income approach to value 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 these approaches, the appraiser is then ready to file a report and stipulate an estimated market value for the subject property. However, it is important to understand that while this amount is probably the best indication of what the property is worth, it may not be the final sales price. There can be mitigating factors such as seller motivation or bidding wars that can affect the final price.
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. In other words, a lender may not be willing to loan a buyer more than the property is appraised for simply because the buyer really wants the property or needs to out-bid a competitor.
The bottom line: if you want to get the most accurate picture of a property’s value, get it appraised.