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What is an Appraisal,
and what is an Appraiser?

The 2024 Edition of Uniform Standards of Professional Appraisal Practice (USPAP) defines these as follows:

APPRAISAL: the act or process of developing an opinion of value; an opinion of value.,

APPRAISER: one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.

A home purchase is often the largest single investment most people will ever make. Whether it’s a primary residence, a 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? This is the role of the appraiser, who by definition must be independent, impartial, and objective.  The purpose of the appraisal is to ensure that the value of the property is commensurate with the amount being paid by providing 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? With few exceptions, it all starts with an inspection of the property. An appraiser visits the property being appraised to ascertain its true status, observing the property’s features, such as the number of bedrooms, bathrooms, the location, and so on, as well as its condition. The inspection often includes a sketch of the property to determine the square footage and convey 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 one or more approaches to estimate the value of real property: a cost approach, a sales comparison, and, in the case of a rental property, an income approach.

Cost Approach

In the cost approach, the appraiser uses a set of procedures through which a value indication is derived by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value.  Cost data from nationally published sources is combined with 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.

Sales Comparison Approach

The sales comparison approach is by far the most widely used approach and may be used to value improved properties and vacant land.  With this method, the appraiser uses a set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently.  This is accomplished by applying appropriate units of comparison adjustments, such as those for square footage, number of bedrooms and bathrooms, quality and type of finishes, etc., to the sale prices of the comparables.  Once the appropriate adjustments are made to the sales prices of the comparable properties, their adjusted values are reconciled into a value estimate for the property being appraised.

Income Approach

In the case of income producing properties – rental houses, for example – the appraiser may use a third approach to valuing the property. With this method, the amount of income a property has the potential to produce is used to derive a value indication for the property with the use of various market-supported multipliers.  As with the sales comparison approach, the income produced by properties similar to the subject are reviewed with appropriate adjustments being made.

Reconciliation

Combining information from all approaches, the appraiser is then ready to conclude 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 account for the final price being higher or lower. But the appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money than the property is actually worth. In its most common application, an appraisal is merely a tool to assist lenders, buyers, and sellers with decisions related to a real estate transaction.

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