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A home purchase is the largest, single investment
most people will ever make. Whether it's 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 pull it
all off.
Most of the people involved are very familiar with
each other. 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? There are too many people exposed in
the real estate process to let such a transaction proceed without
ensuring that the value of the property is commensurate with the amount
being paid.
This is where the appraisal comes in. 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, most people turn
to a licensed, certified, professional appraiser to provide them with
the most accurate estimate of the true value of their property.
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 ascertain the true status of that property.
The appraiser must actually see features, such as the number of
bedrooms, bathrooms, the location, etc., to ensure that they really
exist and are in the condition a reasonable buyer would expect them to
be. The inspection often includes a sketch of the subject 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 subject
property.
Once the site has been inspected, an appraiser
uses two or three approaches to determine the value of real property: a
cost approach, a sales comparison and, in the case of a rental
property, an income 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.
More commonly, appraisers rely on the sales
comparison approach to value these types of items. 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. 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, 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.
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.
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 sale price. There are always mitigating factors such as
seller motivation, urgency or ''bidding wars'' that may adjust the
final price up or down. However the appraised value is often used as a
guideline for lenders who don't want to loan a buyer more money that
the property is actually worth. The bottom line: An appraiser will help
you get the most accurate property value, so you can make the most
informed real estate decisions.
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