As a real estate appraisal professional, I can attest to the monumental nature of purchasing a home. It’s often the most significant investment one ever makes, whether it’s a primary residence, a vacation getaway, or a shrewd real estate investment. This complex financial transaction requires an orchestra of players, each pulling their own strings.
We all know the familiar faces: the Realtor, the front-person of the deal; the mortgage company, the underpinning financial source; and the title company, guaranteeing a smooth transaction and clear title transfer from the seller to the buyer.
But who provides the financial compass, ensuring the property’s value matches the price being paid? Given the large number of individuals involved, and their varying degrees of exposure to potential risks, it’s crucial to validate that the property’s value correlates with the transaction amount.
Enter the indispensable role of the appraisal. A property appraisal, rendered by a licensed, certified, and professional appraiser, serves as an unbiased estimate of the price a buyer might expect to pay or a seller might hope to receive for a piece of real estate. To be informed parties, most people rely on such a professional appraiser to provide the most precise estimate of their property’s actual value.
Let’s delve into the crux of a real estate appraisal: it begins with the property inspection. As an appraiser, my responsibility is to inspect the property being appraised to ascertain its true status. This means checking tangible features, such as the number of bedrooms, bathrooms, the location, etc., to confirm they exist physically and meet the condition a reasonable buyer would expect. The inspection often includes a property sketch, certifying the correct square footage and presenting the layout. Most importantly, I look for any noticeable features or defects that could affect the value of the property, serving as the lender’s eyes and ears.
Once the site inspection is complete, I apply two or three approaches to ascertain the real property’s value: the cost approach, the sales comparison approach, and for rental properties, the income approach.
In this method, I virtually construct the subject property on paper, starting with a land value estimate based on comparable properties. I then use information on local building costs, labor rates, and other factors to deduce how much it would cost to build a similar property. This value often establishes the maximum selling price for a property. After all, why would you pay more for an existing property if you could invest less in constructing a new one?
Sales Comparison Approach
As an appraiser, I frequently utilize the sales comparison approach, also known as the Principle of Substitution. This involves researching the neighborhoods, understanding property features that drive market reaction, and identifying comparable properties’ sales prices. I then make adjustments for features such as square footage, additional bathrooms, hardwood floors, fireplaces, view lots, and so forth to portray the subject property accurately.
For income-generating properties – such as retail and office buildings, or apartment complexes – I may use a third approach to determine the property’s value. Here, the property’s income generation capacity is used to ascertain the present value of those revenues over the foreseeable future.
After collecting data from all approaches, I’m ready to establish an estimated market value for the subject property. Note, this estimate might not always match the final sales price due to variables such as seller motivation, urgency, or bidding wars. However, the appraised value serves as a benchmark for lenders who don’t wish to loan a buyer more than the property’s worth. At the end of the day, an appraiser’s goal is to help you ascertain the most accurate property value, aiding you in making informed real estate decisions.