Why an appraisal?
A home purchase is the largest single investment most people will ever make. Whether it's a primary residence, a vacation home or an investment, buying real property is a complex financial transaction that takes multiple parties to pull off.
Most of them are familiar. The Realtor is the most common face of the transaction. The mortgage company provides the capital. The title company makes sure every step is completed and clear title passes from seller to buyer.
So who makes sure the value of the property is in line with the amount being paid? That is where the appraisal comes in. An appraisal is an unbiased estimate of what an informed buyer might expect to pay, or an informed seller receive, for a parcel of real estate. Most people turn to a licensed, certified, professional appraiser for the most accurate estimate of a property's true value.
The inspection
It all starts with the inspection. The appraiser must see the property's features, such as the number of bedrooms and bathrooms and the location, to confirm they exist and are in the condition a reasonable buyer would expect. The inspection often includes a sketch of the property that documents the square footage and layout. Most importantly, the appraiser looks for obvious features, or defects, that affect value.
After the inspection the appraiser uses two or three approaches to value: the cost approach, the sales comparison approach and, for rental property, the income approach.
Cost approach
The appraiser uses local building costs, labor rates and other factors to estimate what it would cost to build a similar property. This often sets the upper limit on value: why pay more for an existing home when you could build a new one for less? Location and amenities are usually not reflected in the cost approach.
Sales comparison
Appraisers get to know the neighborhoods they work in: the value residents place on certain features, traffic patterns, school zones and busy throughways. They research recent nearby sales of comparable properties and use those prices as the starting point.
The appraiser then adjusts each comparable for differences such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots. If a comparable has a fireplace and the subject does not, the value of a fireplace may be deducted from that sale; if the subject has an extra half bath, value may be added.
Income approach
For income-producing property such as rental houses, the appraiser may also value the property by the income it produces, converting expected future revenue into a present value.
Reconciliation
Combining the approaches, the appraiser arrives at an estimated market value. It is the best indication of what a property is worth, though it may not be the final sale price: seller motivation, urgency or bidding wars can move the price up or down. Lenders use the appraised value as a guideline so they don't lend more than a property is worth.
The bottom line: an appraiser helps you get the most accurate property value so you can make the most informed real estate decisions. If you have questions about an appraisal, or whether one would benefit you, we'd be glad to talk.