What is an appraisal?

A home purchase is the largest single investment most people will ever make. No matter what type of building, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off. 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.

The appraisal ensures that the value of the property is in line with the amount being paid. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller to 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
An appraiser's duty is to inspect the subject property 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 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 the sale price of a property.

Sales Comparison
Appraisers use many types of 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.

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 property’s income is used to arrive at the 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: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.

View a sample appraisal