What is an appraisal
Purchasing a home is typically the most significant investment individuals make in their lives. Whether it's a primary residence, a vacation home, or an investment property, buying real estate involves a complex financial transaction that requires the involvement of multiple parties.
Several individuals play crucial roles in this process. The Realtor is the familiar face most commonly associated with the transaction, while the mortgage company provides the necessary financial capital. Additionally, the title company ensures the completion of all aspects of the transaction and the transfer of a clear title from the seller to the buyer.
However, who guarantees that the property's value aligns with the amount being paid? Given the number of individuals involved in real estate transactions, it is essential to ensure that the value of the property corresponds to the price being paid.
This is where the appraisal comes into play. An appraisal is an unbiased assessment of the potential price a buyer or seller can expect for a specific parcel of real estate. Both the buyer and seller should be well-informed parties in this regard. To acquire accurate and reliable information about the true value of their property, most people seek the expertise of a licensed, certified, and professional appraiser.
What is involved in a real estate appraisal? It all begins with the examination. The responsibility of an appraiser is to thoroughly inspect the property being appraised in order to establish its true condition. The appraiser must physically observe the property's features, such as the number of bedrooms, bathrooms, and its location, to ensure their existence and confirm that they are in a condition that a reasonable buyer would expect. During the inspection, the appraiser often creates a sketch of the property, verifying the accurate measurement of its square footage and illustrating its layout. Most importantly, the appraiser searches for any noticeable features or defects that could impact the value of the house.
Once the site inspection is complete, the appraiser utilizes two or three approaches to determine the value of the real property: the cost approach, the sales comparison approach, and, in the case of a rental property, the income approach.
The cost approach is a straightforward method to grasp. The appraiser utilizes data on regional construction expenses, labor rates, and other relevant factors to assess the approximate cost of constructing a property similar to the one being appraised. This value frequently establishes the maximum limit for the potential sale price of the property. After all, why would someone pay more for an existing property when they could spend less and build a completely new home instead? Although there may be certain mitigating factors to consider, such as location and amenities, they typically do not factor into the cost approach.
Instead, the valuation of such items is based on the sales comparison approach by appraisers. Appraisers take the time to familiarize themselves with the neighborhoods in which they operate. They understand the significance of specific features to the local residents. They consider factors like traffic patterns, school districts, and busy routes, leveraging this knowledge to assess which attributes of a property will impact its value. Subsequently, the appraiser examines recent sales in the vicinity and identifies properties that are comparable to the subject property. The sales prices of these properties serve as a starting point for the sales comparison approach.
Drawing upon their understanding of the value of various elements such as square footage, additional bathrooms, hardwood floors, fireplaces, or scenic views (to name a few), the appraiser makes adjustments to the comparable properties in order to more accurately reflect the subject property. For instance, if a comparable property has a fireplace while the subject property does not, the appraiser may subtract the value of the fireplace from the sales price of the comparable property. Conversely, if the subject property has an extra half-bathroom that the comparable property lacks, the appraiser might add a certain amount to the comparable property's value.
For income-generating properties, such as rental houses, the appraiser may employ a third approach to determine the property's value. In this case, the appraiser takes into account the income generated by the property and calculates its present value over the foreseeable future.
After considering information from various sources, the appraiser proceeds to determine an approximate market value for the subject property. It is important to understand that while this value provides a reliable estimate of the property's worth, it may not necessarily reflect the final sale price. Factors like the seller's motivation, urgency, or competitive bidding can influence the final price. Nonetheless, the appraised value often serves as a reference for lenders who wish to ensure that they are not lending more money to a buyer than the property is truly worth. Ultimately, an appraiser plays a crucial role in providing an accurate property value, empowering you to make well-informed decisions in real estate.