What is an appraisal

The Players:

In mortgage loan transactions the real estate agent is usually the most common face of the transaction. The mortgage company (lender and the appraiser's client) 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. (It is important to note that the purchaser typically does not want to pay more for a property than it is really worth.  Also, a seller would desire to have his/her asking price be most reflective of the CURRENT MARKET to ensure that ALL qualified potential buyers will consider their property).  Please note that there may be different entities involved in appraisals required for other uses, such as estate planning.

 
Who ensures that the value of the property is in line with the purchase price? Many people need to know the value of the property in question. The transaction will not typically proceed without ensuring that the value of the property is reasonable for the purchase price.

This is where the appraisal is needed. 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, many people turn to a certified, professional appraiser (an SRA appraiser oftentimes is most qualified to provide an accurate Opinion of Value for the 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 determine the true status of that property. He/She must actually view features such as the number of bedrooms, bathrooms, the location, etc., to verify their condition that a reasonable buyer and/or lender would expect. The inspection often includes a sketch of the property, determining the proper square footage, conveying the layout of the property, and both interior and exterior photographs. Most importantly, the appraiser looks for any obvious features - or defects - that would impact his/her Opinion of Value. In addition, the appraiser will usually have several questions whose answers are required by his/her client.

Once the subject property has been inspected, an appraiser uses one or more of the approaches or techniques to determine his/her Opinion of Value of the subject property (any of these techniques may or may not be necessary to estimate the appropriate Opinion of Value).

Cost Approach
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates, land costs, and other factors to determine the cost to construct a property similar to the one being appraised.

 
Sales Comparison Approach
For residential appraisals, appraisers rely more on the sales comparison approach than the other techniques to determine their Opinion of Value. 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, lake frontage or Gulf of Mexico views, or golf course (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the indicated value of subject property. For example, if the comparable property has a swimming pool and the subject does not, the appraiser might deduct the value of the swimming pool 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 sale price to compensate for that difference in value. Significant to this Approach to Value are the financing terms and/or the real estate sales trends in the local market.

Income Approach
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 the applicable approaches, the appraiser is then ready to submit an Opinion of Value. It is important to note that while this Opinion of Value is probably the best indicator of the property's worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' or especially now, the market trends in the local market area which could cause adjustments to the final Opinion of Value. But the appraiser's Opinion of Value is often used as a guideline for lenders who want to ensure that they do not lend more than the property is worth as of the date of contract. 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.