Appraisal Basics What is an Appraisal?
An Appraisal of Real Estate is the valuation of the rights of ownership in a given property. An Appraiser must first define the rights he or she is asked to appraise. Rather than creating value, the Appraiser simply interprets the market to arrive at a value estimate of the property. While the Appraiser compiles the data required for a report, consideration is given to location, the site and amenities as well as the size, age and physical condition of the property.
The appraiser begins the task by researching the market, then inspects the property itself, inspects comparable
sold properties, and completes the process by creating and delivering a written report.
Considerable research and collection of general and specific data must be carried out by the Appraiser before he or she can arrive at a
final opinion of value for the object. Since there are many types of value, such as fair market value, insurance value, tax value and value in use, the need to precisely define the purpose of the Appraisal is essential, since different types of
assignments often require different reporting methods or techniques.
Appraisal Methods An appraisal is defined as:
- An opinion of value
- The act or process of estimating value
The opinion or estimate of real estate value is derived by using three common appraisal techniques:
Cost Approach:
An estimate is made of what it would cost to replace or reproduce the improvements as of the date of the appraisal. From this amount is subtracted depreciation in the form of physical deterioration, functional obsolescence and economic (external) obsolescence. The remainder is added to the land value to get an estimate of property value.
Sales Comparison Approach:
The market is researched for sales of properties of similar size, quality and location. These sold properties are compared to the subject property and each sale is adjusted to match the subject for features that the market considers important. These adjusted sales will form a range of value for the subject and the appraiser decides where the subject fits within that range by considering the overall similarity of each adjusted sale.
Income Approach:
This approach is of primary importance when ascertaining the value of income producing properties such as a duplex. It usually has little weight in single family residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.
Once a thorough analysis of all general and specific data gathered from the market is completed, a final estimate or opinion of value is dervied by deciding which valuation approach is the most accurate and best reflects the actions of the market. |
