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 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 opinion of value 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 a viewing of the property.  The appraiser will view the property as a potential buyer would look at it, not as a building inspector or structural engineer. 

The appraiser takes notes of the quality and condition of floor and wall coverings, woodwork, windows, heating/air conditioning, etc.  The number and size of cabinets, closets and countertops are noted.  The layout of the rooms and the amenities offered with the property are also considered in the appraisal.  Interior photos will be taken if there are any physical problems, special features or complexities.  Exterior measurements of the house, garage, porches, decks, and outbuildings are taken.  Sometimes interior measurements are taken if requested by the lender or if there are functional problems.  Photographs are taken of the front and rear of the property and the street scene, and of other views if there are special features.

The viewing of the property will take up to an hour or more for a single family residence (2-4 hours for FHA, Rural Development or other government-backed mortgage appraisal request); and up to two hours or more for a 2-4 family dwelling.

In each assignment, the appraiser considers three approaches to value and completes those that are applicable:  Cost Approach, Sales Comparison Approach, and, in the case of a rental property, an Income Approach.

Cost Approach
The cost approach is the easiest to understand. This method is most applicable for new structures.  The cost of construction, depreciation and land value are taken into account.  As in the Sales Comparison Approach, supply and demand, marketplace trends,  interest rates, and location are also taken into account before the appraiser arrives at an opinion of value for the proeprty. 

Sales Comparison
This method is most often used for single family dwellings.  The subject property is compared directly with other properties that have recently sold and closed that are as similar as possible in quality, age, size, condition, extra amenities and location.  Sales are found through courthouse data, the Multiple Listing Service, the company's files, and from datashare with other appraisers in the area.  The appraiser compiles all relevant data and makes adjustments for differences between the subject and each comparable sale.  Based on this information, along with consideration of market conditions, interest rates, trends, and other variables, the appraiser determines a single value.

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. The anticipated gross rental income of a property together with vacancy loss allowances, deductions for operating expenses, the pattern and duration of the income stream, anticipated resale value and capitalization considerations all enter into determining value.


Final Reconciliation:  the appraiser determines which of the three approaches fit the type, age, price range and use of the property being appraised.  The appraiser also examines the data available for each approach to assure that the most comprehensive data is used.  Once the applicable approaches to value are complete, the appraiser has a range of value from which a final, single opinion of value is derived. 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.