What goes into a real estate appraisal?
It all starts with the home visit.
An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be.
The visit often includes a sketch of the property and photos, ensuring the proper square footage and conveying the layout and condition 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 visited, an appraiser uses two or three approaches to determine the value of the real property.
The three approaches to value are the Sales Comparison Approach, The Cost Approach, and, in the case of an income property, The Income Approach.
When requested, an appraiser can perform a limited appraisal known as a Drive-by Appraisal. This includes an exterior inspection and exterior pictures (front and street) of the home. This format is not compatible with complex assignments. It is primarily targeted for non (mortgage)-lender-type assignments.
A somewhat shorter (but still comprehensive) form type, drive-by appraisal reports for single-family residential properties represent a cost saving over traditional full real estate appraisal reports, while essentially providing the same level of research, analysis, and valuation methodology
1) The Sales Comparison Approach
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, and the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value.
The appraiser researches recent sales in the vicinity and finds properties that 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, lot area, extra bathrooms, kitchen remodels, hardwood floors, or views (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property.
Paired Sales Analysis
Appraisers can tell you a lot about the neighborhoods in which they appraise. We thoroughly understand the value of certain features to the homeowners of that area.
The appraiser looks up recent transactions in close proximity to the subject and finds properties that are 'comparable' to the real estate in question. By assigning a dollar value to certain items such as upgraded appliances, extra bathrooms, an additional living area, quality of construction, and lot size, we adjust the comparable properties so that they are more accurately in line with the features of the subject.
For example, if the comparable property has a pool and the subject does not, the appraiser may deduct the value of a 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.
2) The 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.
3) The 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.
Final 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.
It's not uncommon for prices to be driven up or down by extenuating circumstances like the motivation or urgency of a seller or 'bidding wars”.
But the appraised value is typically used as a guideline for lenders who don't want to loan a buyer more money than the property would likely sell for in an open marketplace.
There are always mitigating factors such as seller motivation, urgency, or ''bidding wars'' that may adjust the final price up or down.
