FAQs

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 estimate 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 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, the location, and so on, to ensure  that they really exist and are in the condition a reasonable buyer would  expect them to be. The inspection often includes a sketch of the property,  ensuring the proper square footage and conveying the layout of the property.  Most importantly, the appraiser looks for any obvious features - or defects -  that would affect the value of the house.

Once the site has been inspected, an appraiser uses two or three approaches  to determining the value of real property: a cost approach, a sales  comparison and, in the case of a rental property, an income approach.

Cost Approach
The cost approach is the easiest to understand. The appraiser uses  information on local building costs, labor rates and other factors to  determine how much it would cost to construct a property similar to the one  being appraised. This value often sets the upper limit on what a property  would sell for. Why would you pay more for an existing property if you could  spend less and build a brand new home instead? While there may be mitigating  factors, such as location and amenities, these are usually not reflected in  the cost approach.

Sales Comparison
Instead, appraisers rely on the sales comparison approach to value these  types of items. Appraisers get to know the neighborhoods in which they work.  They understand the value of certain features to the residents of that area.  They know the traffic patterns, the school zones, the busy throughways; and  they use this information to determine which attributes of a property will  make a difference in the value. Then, the appraiser researches recent sales  in the vicinity and finds properties which are ''comparable'' to the subject  being appraised. The sales prices of these properties are used as a basis to  begin the sales comparison approach.

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.

In the case of income producing properties - rental houses for example - the  appraiser may use a third approach to valuing the property. In this case, the  amount of income the property produces is used to arrive at the current value  of those revenues over the foreseeable future.

Reconciliation
Combining information from all approaches, the appraiser is then ready to  stipulate an estimated market value for the subject property. It is important  to note that 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  mitigating factors such as seller motivation, urgency or ''bidding wars''  that may adjust the final price up or down. But the appraised value is often  used as a guideline for lenders who don't want to loan a buyer more money  that the property is actually worth. 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.

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