What is an Appraisal?
The American dream is to purchase a family home. This
dream has become more and more expensive as home prices have escalated. The
purchase of a home is often the single largest investment for most
families. This is also one of the most complex transactions. This is
complicated by the fact that there are normally multiple organizations
involved in the transaction. While the Realtor or Mortgage Broker (for a
refinance) is the face for these transactions there are many other people
who are involved. The title company completes all the paperwork and verifies
that a clear title passes between the buyers. The buyer is also concerned
that they have purchased the property at a reasonable price. The seller
wants to maximize the amount they obtain from their investment. In a
refinance the owner wants to make sure they obtain the best possible rate
and minimize their future costs. This is where an unbiased appraiser comes
into the equation. The appraiser provides an estimate of the value of the
property based upon their experience and the current market conditions for
similar properties. Most people want a licensed, certified, professional to accomplish the work and provide the
accurate estimate of value for your property.
So What Happens
The appraisal is normally accomplished in two
stages. The appraiser will call and schedule a time to come look at the
property. This is called the inspection. Once the inspection is complete
the appraiser takes the data gathered back to their office. Here they look
for similar properties in your area and use those as the basis for constructing
an estimate of the value of your property.
The Inspection
The appraisal starts with the inspection. An
appraiser inspects the property to determine the current status of the
property. The appraiser is capturing information, such as the number of
bedrooms, bathrooms, the location, as well as the current condition of the
overall property. The appraiser is not concerned with daily clutter or “normal living” conditions. The appraiser is looking for the
underlying value of the property. The appraiser will often draw a sketch of
the property, ensuring the proper square footage and conveying the layout
of the property. The appraiser will also take pictures of the property to
covey to the lender a view of the property. In some cases the appraiser may
take interior pictures to show special features of the home. Most
importantly, the appraiser looks for any obvious features - or defects -
that would affect the value of the house.
Once the appraiser has completed the inspection they return to their office
and begin the process of building the actual appraisal. The appraiser uses
three different methods to determine the value of most properties.
Cost Approach
The cost approach provides an upper limit to the
value of the property and is the easiest to understand. The appraiser uses
local building costs, labor rates and other local factors to determine how
much it would cost to construct a property similar to the one being
appraised. There may be mitigating factors, such as location and amenities,
these are usually not reflected in the cost approach and therefore the
appraiser must adjust for these factors.
Sales Comparison
Most appraisals rely heavily on the sales
comparison approach. This is generally considered the most reliable measure
of the property as it reflects current market conditions for similar
properties in the immediate area. Appraisers get to know the neighborhood
and what market conditions are occurring. Is the neighborhood growing and
expanding? Is it stable and grown out? Is it in decline? What is happening
in the area? Is a major employer moving into or out of the area? Are new
highways, shopping centers, changes in zoning, or other changes planned in
the area? Appraisers understand what changes provide value and which may
result in lower values. The appraiser then researches recent sales in the
vicinity to find similar properties. Few homes are exact duplicates but the
appraiser finds properties with the similar square footage, lot sizes,
bedrooms, baths and other major features. The appraiser then selects the
most similar properties and then adjusts the value of each property to
duplicate the major features of the subject. For example if the comparable
property has an extra half bath then this must be deducted from the value
of the comparable to make the comparable equivalent to your property. The
appraiser conducts this analysis and adjusts each property until the
closely represent the subject property. Once this has been accomplished the
appraiser analyzes the resulting values. Based upon the appraisers
experience a value will be given to your property.
Income Approach
If the property is to be used as a rental or
income producing property then a third approach will probably be used to
determine the future value of the revenue the property will generate in the
future. For income producing properties the appraiser is often required to
complete additional complex forms and therefore these appraisals are more
expensive.
Reconciliation
Once all of the information has been gathered the appraiser
looks at the three approaches and determines which most closely represents
your property. They will compare and contrast the three methods to come up
with a best indication of the value for your property. There are always
mitigating factors such as seller motivation, urgency or ''bidding wars''
that may adjust the final price up or down. This short term market
conditions impact the actual price paid for a property but have minimal
affect on the value. The appraised value is often used as a guideline for
lenders who don't want to loan a buyer more money that 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.
Big Sky Appraisals | 20459
Oatlands Chase Place
Leesburg, Virgina 20175 | Phone: 703-737-0042
Fax: 703-737-0003 | bigskyappraisals@verizon.net
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