What is an appraisal?

A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home or investment purposes, 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 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 value of their property.

What goes into a real estate appraisal?

The Inspection
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, 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. The mitigating factors such as location and amenities are not usually 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 subject’s market area as required by USPAP (Uniform Standards of Professional Appraisal Practice) guidelines.  They then find 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.

Applying knowledge of the value of items such as square footage, extra bathrooms, hardwood floors, fireplaces or lot adjustments (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property.

In the case of income producing properties – such as rental houses - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to forecast the potential revenues of the subject property.

Reconciliation
Combining information from all approaches, the appraiser is then ready to formulate an estimated market value for the subject property. 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 external factors such as seller motivation or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders during the loan process. Ultimately: an appraisal will help you gain greater insight into the value of your property which allows you to make more informed real estate decisions.