 So just 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 home or an investment property, , the purchase of real estate property is a complex financial transaction that requires multiple parties working together to pull it all off with the least amount of blood, sweat and tears.
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 exposed 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 receives - 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 value of their property.
What goes into a real estate appraisal?
The Inspection
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. The appraiser must actually see features, such as the number of bedrooms, bathrooms, quality of the construction, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be.
Approaches to Value
There are three commonly accepted methods used to estimate market value: the Cost Approach, Sales Comparison Approach, and Income Capitalization Approach. Depending on the appraisal assignment, one or more of the approaches may be impossible, impractical, or simply not used by market participants. The type of property and the amount and quality of data available affect the appropriateness and reliability of a particular approach for a specific property.
Cost Approach
Land value is a significant component in this analysis. Land sales are adjusted for differences in location, size, access/exposure/visibility, condition and other attributes. The adjusted prices are then used to estimate market value of the subject site. Direct and indirect costs, including entrepreneurial incentive are researched to obtain the replacement cost new. All forms of depreciation are deducted from the replacement cost new and the site value is then added.
Sales Comparison
In the Sales Comparison Approach, the property that is being appraised is compared to similar properties that have recently sold. The sales prices of these properties are used as a basis to begin the sales comparison approach. Adjustments are applied to the comparable properties for differences in property rights conveyed, conditions of sale, financing, expenditures immediately after the sale, market conditions, location, access/visibility/corner influence, building size, quality/appeal, age/condition, and other physical attributes. The Sales Comparison Approach is generally the approach given the most consideration in residential property appraisal.
Income Approach
The Income Capitalization Approach analyzes a property's ability to generate net income. The property being is analyzed using techniques similar to those a potential purchaser-investor might employ. The most common methods of income analysis are the direct capitalization and discounted cash flow methods. The direct capitalization method considers a subject’s current annual income potential, vacancy and collection loss, and expenses to estimate a projected net operating income (NOI). The NOI is then capitalized (divided by) at a rate based on market data and investor expectations. In the Discounted Cash Flow (DCF) analysis, income and expenses are forecast over a typical holding period of the property. At the end of the holding period, a sale is assumed. The resulting cash flows are then reverted to present value using a discount rate based on investors’ expectations.
Reconciliation
Combining information from all approaches, the appraiser is then ready to develop an opinion of market value for the subject property. 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 external factors such as seller motivation or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders during the loan process. Ultimately, an appraisal will help you gain greater insight into the value of your property which allows you to make more informed real estate decisions.
|
