An appraisal of any real estate is simply an opinion or an estimate of the property’s value. It is an evaluation determined by someone qualified to estimate value of real property.

Who determines who is qualified to give such opinion or to estimate the value? There are two different trade organizations: The Appraisal Institute, which resulted as a merger between The American Institute of Real Estate Appraisers and The Society of Real Estate Appraisers and The National Society of Real Estate Appraisers. Both organizations hold their members to rigorous standards and certifications are based on continuing education requirements, ethical standards, and grievance and enforcement procedures.

Most lenders require a property appraisal for a new mortgage loan. The appraisal attempts to justify the value of the property to the lender and to the buyer and is usually done after the contract is signed. Appraisals, however, are also performed to determine a reasonable offering price in a sale, property value for estate tax purposes, value of land versus structure, and for insurance and tax purposes.

An appraisal report describes the results of the procedure. Reports can be presented in different ways, including oral, written, narrative, letter or form style. Most residential appraisals are presented on a standard Uniform Residential Appraisal Report. This form meets the requirements of most lenders as well as those in the secondary market. Subjects covered by an appraisal usually include information with regard to the neighborhood, the site, improvements, interior finish and equipment and a valuation section which includes the method of appraisal used and a Market Data Analysis comparing similar properties in the neighborhood. There are usually photographs attached showing the property from various views and Area and Tract Map identifying the property’s specific location. If there are comparable sales listed, there will be photographs of those properties.

The appraiser tries to determine “the fair market value” of the property. This estimation is approached in 3 ways: 1) The Cost Approach which determines the replacement cost of the land and the building at today’s rates, less depreciation, 2) the Income Approach, which measures the income potential of the property and 3) the Price Method, which is the most valid approach. This method analyzes the selling prices of recently sold, comparable properties in the area. Sometimes a combination of these methods is used for evaluation.

An appraisal is estimation. It does not determine the market rate, indicate a thorough inspection, guarantee the condition, or grant or imply any warranties regarding the condition of the property. Appraisals are not infallible – they depend on the appraisers’ experience and competence, or incompetence.

If you are not sure of an asking price for real estate, order an appraisal. A realtor’s opinion may not accurately reflect the true market price. Use a well-recommended appraiser, one who is in good standing in his trade organization. Use a specialist trained in residential evaluation when seeking a residential property or a specialist in commercial properties for commercial property purchases.

An appraiser can help your clients avoid over-paying for a property. If an appraiser comes in low, find out why. It may be that the appraiser is missing something significant about the property. It may also be normal for the market price to be 110% -120% of the appraised value. This is true in many markets.

More News >>