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Definition of an Appraisal

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The purchase of a home is the largest, single investment most people will ever make in their lifetime. Whether it is a primary residence, a second home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to complete.

The people involved are very familiar with the process. The Realtor's are the most common face's of the transaction. The mortgage company provides the financial capital (loan)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.

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.

An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receives - 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 goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to determine 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 that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection typically includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. The appraiser also looks for any obvious features - or defects - that would affect the value of the house.

Once the site has been inspected, an appraiser uses several approaches to determining the estimated value of the subject real property: a cost approach, a sales comparison and possibly an income approach.

The Cost Approach
The cost approach is the easiest to understand. The appraiser uses data on local building costs, labor rates and additional factors to determine how much it would cost to construct a property similar to the subject property being appraised. This ccost approach value typically 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 typically not reflected in the cost approach.

The Sales Comparison
Appraisers rely on the sales comparison approach to value these types of items. Appraisers must have knowledge and experience in the neighborhoods in which they work. Appraisers  understand the value of certain features to the properties within the market 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. 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.

Utilizing 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 bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

In the case of income producing properties, the appraiser may use a third approach to valuing the property (the income approach). 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 stipulates 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 multiple offer's' that may adjust the final price upward or downward. 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 appraiser will estimate the most accurate property value, allowing the buyer to make the most informed real estate decisions.