What Is An Appraisal?

Real estateAn appraisal is an unbiased opinion of the value of a property. The value opinion is provided by a licensed professional, commonly known as an appraiser, whose unbiased opinion of a property is supported by housing data from the subject’s market. The typical opinion of value given by real estate appraisers is called “market” value. Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Think of an appraiser as a researcher and an appraisal as the researchers findings. The first step in the appraisal process is typically an inspection of the property being appraised. During the physical inspection, the appraiser gathers data by measuring the improvement, determining quality & condition, and recording all features of the subject property. The appraiser also analyzes the subject’s neighborhood for any external issues that may have an impact of the subject’s value. Once the subject property has been inspected, an appraiser uses three main approaches to determine the value of the property: the cost approach, the sales comparison approach, and/or the income approach.

The cost approach is typically the easiest to understand. The appraiser utilizes local building costs and other factors to determine how much it would cost to construct a property similar to the one being appraised. The cost approach is the least used method to determine a properties market value as the approach is based solely on cost numbers and does not factor in market variables.

The second approach to determining value and the most utilized is the sales comparison approach. The sales comparison approach utilizes comparable sales from the subject’s market to determine a value. The appraiser compares these sales to the subject property based on each individual characteristic of the subject as well as other items such as view, location, and site size. No two properties are exactly identical; therefore the appraiser will make adjustments to the comparable sales for the differences in comparison to the subject property. The subject’s market is analyzed to determine market trends. If the appraiser finds that the market is shifting, either positive or negative, time adjustments are also applied to comparable sales. This approach to value is typically considered the most reliable in forming an opinion of market value as the data utilized in this approach is taken directly from the subject’s market.

The third approach to determine value is the income approach. The income approach is typically utilized when a neighborhood has a measurable number of renter occupied properties. In this approach, the amount of revenue a property produces is taken into consideration along with other rents in the area for comparable properties to give an indicator of the current value. This approach is the least utilized as the majority of properties purchased are typically for primary occupancy.

Analyzing the data from all applicable approaches, the appraiser is then ready to state an estimated market value for the subject property. The appraised value is typically used as a guideline for lenders or private parties who don’t want to loan a buyer more money than they could get back in case they had to sell the property again. An appraiser will help you discover the most fair and balanced property value, so you can make wise real estate decisions.