Real Estate Appraisals: A Primer

Their home's purchase is the largest transaction many will ever encounter. Whether it's a primary residence, a second vacation home or an investment, purchasing real property is an involved transaction that requires multiple people working in concert to see it through.

The majority of the people involved are very familiar. The real estate agent is the most familiar entity in the exchange. Then, the lender provides the financial capital necessary to finance the deal. And ensuring all areas of the exchange are completed and that a clear title passes to the buyer from the seller is the title company.

To learn more about appraising, click here to see a short video or call us today to talk about your specific property.

So, who's responsible for making sure the real estate is worth the purchase price? In comes the appraiser. We provide an unbiased estimate of what a buyer could expect to pay — or a seller receive — for a property, where both buyer and seller are informed parties. A licensed, certified, professional appraiser from The Appraisal Company will ensure, you as an interested party, are informed.

Inspecting the subject property

Our first duty at The Appraisal Company is to inspect the property to ascertain its true status. We must actually see features, such as the number of bedrooms and bathrooms, the location, amenities, etc., to ensure they indeed exist and are in the condition a reasonable person would expect them to be. The inspection often includes a sketch of the property, ensuring the square footage is proper and illustrating the layout of the property. Most importantly, we identify any obvious amenities - or defects - that would affect the value of the property.

Following the inspection, an appraiser uses two or three approaches to determining the value of real property: a sales comparison, a replacement cost calculation, and an income approach when rental properties are prevalent.

Cost Approach

Here, the appraiser uses information on local building costs, labor rates and other elements to calculate how much it would cost to replace the property being appraised. This figure usually sets the maximum on what a property would sell for. The cost approach is also the least used method.

Analyzing Comparable Sales

Appraisers are intimately familiar with the neighborhoods in which they work. They innately understand the value of specific features to the people of that area. Then, the appraiser looks up recent transactions in the neighborhood and finds properties which are 'comparable' to the subject in question. Using knowledge of the value of certain items such as upgraded appliances, additional bathrooms, additional living area, quality of construction, lot size, we adjust the comparable properties so that they more accurately match the features of subject.

  • If, for example, the comparable property has an irrigation system and the subject doesn't, the appraiser may subtract the value of an irrigation system from the sales price of the comparable.
  • In the case where the subject has something such as an extra half bath that a comparable doesn't have, the appraiser might add the value of that bath to the comparable property.

A valid estimate of what the subject might sell for can only be determined once all differences between the comps and the subject have been evaluated. At The Appraisal Company, we are an authority when it comes to knowing the value of particular items in Andover and Butler County neighborhoods. The sales comparison approach to value is most often awarded the most importance when an appraisal is for a real estate exchange.

Valuation Using the Income Approach

In the case of income producing properties - rental houses for example - we may use a third way of valuing real estate. In this scenario, the amount of income the real estate produces is taken into consideration along with income produced by comparable properties to derive the current value.

Putting It All Together

Combining information from all applicable approaches, the appraiser is then ready to put down an estimated market value for the property at hand. It is important to note that while the appraised value is probably the best indication of what a property is worth, it probably will not be the price at which the property closes. 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 typically employed as a guideline for lenders who don't want to loan a buyer more money than they could recover in case they had to sell the property again. It all comes down to this, an appraiser from The Appraisal Company will help you get the most fair and balanced property value, so you can make the most informed real estate decisions.