Real Estate Appraisal
A real estate appraisal is the process that is used in order to arrive at an accurate valuation of residential real estate, commercial real estate or land. Each property is unique, and therefore, a detailed valuation is needed.
Real estate appraisals are commonly used by mortgage companies, banks, or other lenders prior to making a loan, in order to ensure that their investment is properly secured by a property that is worth at least as much, if not more than the amount of money they are lending against it.
These real estate appraisals assist the lender in determining how much to lend, what the down payment will be, and even, in some instances, what the interest rate will be.
The cost of an appraisal can vary, but in the midwest it is typically in the $400-$500 range. Appraisals in rural areas, and for multi unit properties usually cost more. The lender will choose the appraiser, and the buyer will pick up the fee, payable at closing.
Real estate appraisals are also often used to determine the selling price of a property. They are also needed often for selling estates, divorces, taxation, etc
Generally, appraisers of real estate give an estimate of the buildings, and the land that the buildings sit on normally prior to it being sold, insured, mortgaged, developed, or taxed.
In most countries, appraisers have to go through training, and have to be certified and/or licensed. In the US, most states require a Bachelors Degree in addition to the license, and certification. Certified/Licensed Appraisers typically make about $55,000 per year, or about $25 per hour USD.
One of the biggest benefits to becoming a real estate appraiser, besides the fact that it pays fairly well, and is a needed, respected profession, is that it is the perfect foundation, pun intended, to becoming a real estate investor.
Knowing precisely how to evaluate a property is the single most important aspect of buying a property at a below market price, to ensure a profit, or positive cash flow. I personally know appraisers that also invest in real estate.
There are many valuation types strived for by the appraiser. The most common of these is market value.
Market value is defined as the price at which an asset would sell in a competitive auction setting. Market value is considered the same as fair value, or open market value.
Other types and definitions of value are, liquidation value, insurable value, investment value, value in use, and net present value.
There are three traditional approaches to value.
- The Cost Approach: the property buyer would not pay more than it would cost to build the equivalent. This approach is often used by insurance companies to determine repair, and replacement values.
- The Income Approach: close to the methodologies used for securities analysis, bond pricing, and financial valuations. This approach is often used by and for investor buyers.
- The Sales Comparison Approach: a way of comparing amenities and characteristics of with others of recently sold comparable properties in similar type transactions. This approach is most commonly used by single family home residential buyers.
There is a great deal of preparation, and execution in the process of a typical real estate appraisal. The duties that are required by the appraiser are:
- Confirm legal descriptions of real estate property in the public records.
- Take photos of the both the exterior and the interior of properties.
- Inspect existing, and new properties, documenting their characteristics.
- Analyze similar nearby properties or comparable properties to determine valuations.
- Maintain, and prepare current written information or data on every real estate property.
- Design written property value reports.
When appraising a property, appraisers not only take into consideration the subject property, but also the surrounding area. such as a busy road, the proximity to public schools and parks, or a view from the back.
The basic valuation concepts are:
- Scarcity – the actual supply of properties that are competing
- Utility – the ability to meet the needs and desires of future owners
- Demand – the desire or need of ownership, supported by the financial means to accomplish the desire
- Transferability – how easily ownership rights are transferred from one party to another
Appraisers typically work in one locale, so as to be as familiar with real estate trends, and property factors that affect property values, such as environmental issues.
During the full real estate appraisal process, the appraiser notes and documents their methods, research, and observations used in arriving at their resulting estimate of a properties current value.
Appraisers normally specialize in one type of real estate or another. Residential appraisers usually don’t get involved with commercial appraisals, and commercial appraisers under most circumstances don’t provide residential appraisals.
How does a real estate appraisal differ from a home inspection? A real estate appraisal differs from a home inspection in that an inspection is used to determine the condition of a given property, including the house or structures and it’s systems.
An inspector is normally hired by a buyer, or a potential buyer to allow them to know what repairs may need to be made, and for leverage in the negotiating process with the seller, and basically to protect the prospective buyer from major flaws or defects.
If an inspection reveals major repairs need to be made, the buyer then can try to renegotiate price, or have the seller fix the issues prior to their moving in. The buyer can also, in some instances, back out of the deal altogether, based on the the home inspection results.
The real estate appraisal on the other hand, is more concerned with achieving a value of the property. The appraiser may use the inspection, if available, to assist him in his appraisal.
The appraiser may also similarly inspect aspects of the property to help him determine a current value. Unlike a home inspector, the appraiser will not inspect the home’s mechanical systems, and major appliances.
The real estate appraisal is seldom if ever utilized by the residential buyer or potential buyer, other than to possibly give them a general idea of value. The appraisal is used by and for mortgage companies or lenders, insurance companies, for selling estates, divorces, and taxation.
If the property does not ‘appraise out’, or is not deemed to be worth enough to cover the lender’s loan, the mortgage company, bank, or other lender will not lend on it.
The buyer must then talk the owner into agreeing to a lower price, or the buyer must find another property to purchase.