Whether sightseeing as a tourist or flipping through the pages of a magazine, many of us have often wondered how much a ski chalet in Vail, a mansion in Palm Beach, or a penthouse in Manhattan is really worth. Real estate appraisers specialize in assessing the value of land and buildings for purchasers and sellers, enabling them to proceed with the real estate sales transaction. Appraisers determine the real estate value of a particular piece of property by inspecting it, analyzing its location, and comparing it to similar real estate listings. Local governments base property taxes on real estate appraisers' findings. Also, a satisfactory appraisal is pivotal for prospective borrowers' attainment of a home loan commitment. This is because a mortgage lender wants its investment to be protected in the event that a client defaults on the home mortgage. In other words, the creditor seeks to ensure that the real estate will sell for at least the monetary value of the loan.
A real estate appraisal is defined as an objective estimate of the payment that a seller might expect to receive or the price that a buyer might expect to pay for a parcel of land. It is the practice of establishing the market value of real estate property, that is, its potential sales price if sold in a competitive and open real estate market. Prospective borrowers who intend to pledge real estate as security for a mortgage are required by lenders to submit an appraisal. An appraisal report is usually detailed and constitutes the only valuation document that a lender will take into consideration when determining whether or not to approve a mortgage. It is drafted by a certified or licensed real estate appraiser. Licensure is required in all fifty states. The role of an appraiser is to ascertain the most accurate estimate of the real estate values of their clients' properties, which in turn helps buyers and sellers make informed decisions vis-a-vis the property in question. Appraisers inspect the subject property, or the real estate under consideration, and typically provide the following information in their reports:
- An overview and analysis of the area's real estate market;
- A detailed description of the subject property and comparisons with three other comparable properties;
- Appraiser's observation of items that adversely impact the property's value (i.e. poor access to the home);
- Notations about patent or obvious defects (i.e., a dilapidated foundation) that will likely devalue the property;
- An estimate of the average amount of time for the property to sell; and
- The type of locale in which the home is situated (i.e. a stand-alone acreage, development)
Appraisers will examine features such as location, the number of bathrooms and bedrooms, among other items, to verify their existence and ensure that they are in the condition expected by a reasonable purchaser. Upon completion of the inspection, appraisers will utilize one of three methods for determining the value of real estate. The two most commonly-used appraisal approaches for residential properties are 1) the cost approach and 2) the sales comparison approach. The third methodology - income approach - is applicable in the valuation of investment and commercial properties (i.e. rental properties).
1. Cost approach
New properties are usually appraised by using the cost approach, since information about building costs is available. In the cost approach, appraisers estimate a property's value by considering the value of the land and the depreciated worth of any improvements. Appraisers research the labor rates, replacement cost, construction costs in the area to calculate the cost of building, with modern materials and workmanship, a property that matches the one being appraised. Thus, appraisers rely on replacement cost and then deduct an amount for depreciating structures of the subject property. The final value represents the upper limit on what the real estate under consideration would sell for.
2. Sales comparison approach
To estimate the property's market value, the appraiser first studies recent sales in the area and compares the subject property to "comparable" properties being sold in the marketplace. This approach focuses on the real estate prices of comparable properties that have sold in the vicinity. The sales prices of similar properties are then adjusted to take into account differences between those properties and the subject. The appraiser considers the value of such items as marble floors, fireplaces, extra bathrooms, and square footage when performing the adjustment. The appraiser makes the components of the comparable properties more in-line with those of the property being appraised. This produces a figure that indicates the amount that the similar properties would have sold for if they were equipped with the same features as those present in the subject property.
3. Income capitalization approach
For rental homes, apartment buildings, warehouses, shopping centers and other income-producing properties, appraisers tend to employ this method of property valuation. The amount of revenue that a parcel of real estate produces is used to arrive at the present value of its net operating income over the foreseeable future.