What is an appraisal?

Noun - an act of assessing something or someone. A real estate appraisal by a certified/licensed appraiser is an independent opinion of value based on current market conditions.

Real estate is the largest investment made by most people in the United States. But the typical American will only go through this process a few times throughout their lifetime, either moving up as a family grows or downsizing as we age. But there are many other reasons you may need an appraisal such as estate planning, tax purposes, property tax rebuttal, determining a list price, or refinancing. 

In a typical purchase transaction there are multiple people working together to see it through. There are typically a real estate agent for the seller, real estate agent for the buyer, the title company, home inspector, the bank, and the appraiser. All are working together to ensure clear title passes from the seller to the buyer and that all parties have the necessary information to make informed decisions. 

The appraiser determines if the price being paid is in line with current activity in the marketplace. We complete this task with no alliances to any party involved in the transaction. Our job is to provide an independent opinion of value based on data available at the time of inspection. 

Original Research

While it may seem that the appraiser's job begins and ends at inspection, this is not the case. Substantial initial research is made prior to the appraiser reaching the property. An initial search looks at available data about the property being appraised recent activity in the market area, and overall trends in the marketplace. 

Inspection of the Property

We inspect the property to determine the overall quality of the construction, overall condition, any recent upgrades or remodeling, along with external factors that may impact value. Typically the property is measured to verify the features are in line with public data, determine if there have been any additions, and to analyze the utility of the floorplan. While in the neighborhood the appraiser will drive by recent sales and listings in the neighborhood to determine their condition and external locational factors. 

Sales Comparison Analysis

The first approach to value is the sales comparison analysis. Once the subject and sales activity in the neighborhood have been inspected, the appraiser analyzes the overall marketplace. Data for the nation, state, city, and immediate market area is analyzed to determine current market conditions and pricing trends. The MLS listings and public data of the sales and listings are reviewed to compare condition and features to the subject. The appraiser will typically use a combination of paired sales analysis, regression analysis, conversations with local realtors, and the appraiser's experience in the market area to determine dollar adjustments for differences in features. 

These dollar amounts are applied to the sales and listings resulting in adjusted sale prices. The goal is bring these adjusted sale prices into a tighter range that point to a probable sale price. This is typically the strongest indicator of value for typical residential properties. The experts at Newport Appraisal Specialist LLC have the experience to provide you with a credible sale price. 

Cost Approach to Value

The second approach to value is cost. The appraiser will gather cost data by nationwide providers or local contractors to determine construction costs, labor rates, along with other factors to calculate how much it would cost to replace the property being appraised. The depreciated cost is added to the land value to provide a full value of replacement. These last two parts are the weakness of this approach. In an area where there is an active vacant land market and the property being appraised was recently constructed this approach is valid. In built up neighborhoods with no vacant land sales and with older properties where depreciation can vary widely this approach is less reliable. 

Income Approach to Value

The third way of valuing real estate is the income approach. The appraiser attempts to determine a reasonable rent for the subject property by looking and similar rental properties in the area and applies that rental amount to a rate determined by analyzing rental properties that have sold in the market area. This approach is strongest when applied the apartment complexes and commercial properties. Most single family homes have limited rental activity in individual market areas and typical buyers do not consider possible rental income in most markets. 

Arriving at a Final Value

The appraiser will consider all three approaches to value in determining a final value. All three may be necessary to determine a credible value, or just one may be the only credible approach. Many people believe that because two parties have agreed to a price in a purchase agreement, that sets market value. In some cases it does. But sometimes the seller is highly motivated by financial distress, death, or divorce. Sometimes the buyer is highly motivated by a particular feature of a home, frustration in a tight market, or are just unfamiliar with the market area. In these cases the contract price can be substantially different that what market activity will support. Newport Appraisal Specialist LLC have the experience to provide you with a fair and balanced opinion of value. (949) 214-5558.

Here are some additional places to research what goes into an appraisal:

The Appraisal Foundation, US Department of Housing and Urban Development, Bureau of Real Estate Appraisers.