Watch a video about a residential appraisal.
For many people, the purchase of real estate is the largest, single investment they will ever make. Whether it's a primary residence, or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it off.
An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receives - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party and often to mitigate risk of mortgage fraud, many lenders turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.
Market Research
So what goes into a real estate appraisal? It all starts with the research of the market to which the property belongs. In most cases, an appraiser is already keenly aware of local market behaviour but, as local economic factors change, it is important for the appraiser to remain abreast of characteristics that traditionally drive real estate prices such as employment rates, migration data, inflation, building starts and absorption rates.
Inspection
An appraiser's duty is to examine the property being appraised or the architectural drawings of a property being constructed that is to be valued on basis of completion. He or she must actually see features, such as building layout, the location, and so on, to ensure that they exist and are in the condition a reasonable buyer would expect them to be.
Once the property has been inspected, an appraiser may use multiple approaches to determining the value of real property including a cost approach, direct comparison and income approach.
Cost Approach
The cost approach is often the easiest to understand. It is the estimated land value plus the estimated cost to construct the building less the estimated depreciation of the building. The appraiser uses information on local building costs, labour rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. The building depreciation can be estimated using cost estimation software or depreciation tables.
Direct Comparison
Appraisers frequently rely on the direct comparison approach to value for most property types. The appraiser researches recent sales or listings in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales or list prices of these properties are used as a basis to begin the direct comparison approach.
Using knowledge of the value of certain items such as square footage, interior finishing, location, or view lots (just to name a few), the appraiser adjusts the comparable properties to form a value estimate of the subject property.
Income Approach
In the case of income producing properties, the appraiser may use an income approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
In direct capitalization, the property value is reflected through a relationship between one year's stabilized net income and either a capitalization rate based on market rates of return for similar property.