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In order to protect all parties in a financial transaction involving Real Estate an independant and accurate evaluation of the property involved would require an Appraisal. This Appraisal should be accomplished by the most qualified and experienced Appraiser available with knowledge of your market.
Most of the people involved are very familiar.
- The Realtor is the most common face of a sales 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.
- 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. Because of the independent nature of the Appraiser i.e. his compensation is not tied to the value of the property, he can be expected to give the most accurate and unbiased opinion of the current value of the property. This will not always coincide with the value developed by the Realtor with a Competetive Market Analysis which is a less detailed and less in depth procedure
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.
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 data is obtained from Marshall Swift Residential Cost Handbook). 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?
Appraisers rely most heavily on the sales comparison approach. Appraisers are familiar with the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, busy throughways, quality of construction and amenities to certain neighborhoods; 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 subdivision or immediate neighborhood 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, number of bathrooms, updated kitchen, baths or floor coverings, paint or roof coverings or view lots such as water or golf front (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 an inground swiming pool and the subject does not, the appraiser may deduct the value of the extra feature 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 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.