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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 taking risk
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. He or she must actually see features such as the number of
bedrooms, bathrooms and the location 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 that 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.
Income Approach
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.
Do you need an appraisal?
Contact us today!
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