|
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. 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.
The Inspection
So
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. He
or she must actually see features, such as the
number of bedrooms, bathrooms, the location, and
so on, 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 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: a cost approach, a sales
comparison and, in the case of a rental
property, an 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 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.
Sales
Comparison
Instead, 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; 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 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.
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. 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 who don't want to loan a buyer more
money than the property is actually worth. 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.
|
|
