What Is A Residential Appraisal?

A home purchase is likely the single, largest investment most people will ever make. Be it 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 successfully complete.

Most of the people involved are very familiar with the process and with each other. The buyer's and seller's Realtors who negotiated the transaction, the mortgage company and lender representative that provides the loan proceeds to fund the transaction. The title company ensures all aspects of the transaction are completed and 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 where the appraisal comes in. An appraisal is unbiased estimates 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
What makes up a real estate appraisal? It 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 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: cost approach, sales comparison and, in the case of a rental property, 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 than it would cost to build it new?

Sales Comparison
The sales comparison approach to value takes into account mitigating factors, such as location and amenities, which are usually not reflected in the cost approach. Appraisers know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the community layout, traffic patterns, school zones and 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 property being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Comparables - Using 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.

Income Approach
In the case of income producing properties, rental houses for example, the appraiser may use a third approach when 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 / Written Appraisal Report
Reconciliation is the accomplished by combining information from all approaches used, the appraiser is then ready to stipulate an estimated market value for the subject property. The resulting written report is known as the written appraisal report.

It is important to note that while this value 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. 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.

Additional Resources
Estimating Home Value Some Commonly Asked Questions About Real Estate Appraisers and Appraisals