Making Sense of the Appraisal Process
Purchasing a house is one of the most important investments you can make. Whether it's a primary residence, vacation home or property you plan to rent out, purchasing real property is a complex transaction that requires multiple parties to make it all happen.
What does an appraiser do?
Appraisers provide an unbiased estimate of a property's true, objective value using current and verifiable real estate sale data in the property's home market. Some of the criteria used by appraiser when determining a property's value include:
The interior and exterior condition of a property
Property amenities such as a finished basement or swimming pool
Safety or health code violations
Depending on the type of appraisal ordered, an in-person interior inspection of the home by the appraiser may be needed. During an interior inspection - which should not be confused with a home inspection completed by a home inspector prior to a sale - the appraiser will look through each room of the home, plus the basement, attic and garage areas. Any other structures on the property, such as a barn or coach house, will also need to be seen.
An exterior inspection will also be performed, where the appraiser will review the outside of the home, including a walk-through of the property for homes with acreage.
The appraiser will take photos throughout both inspections, as well as measurements to confirm room size. Don't worry if you're camera-shy - the appraiser will never include anyone in the home in any of the photos taken.
How does an appraiser determine the property's value?
After the appraiser has gathered information about the home and completed any required inspections, they compare it to similar homes in the same market to make their estimate.
Appraisers use two or three approaches when determining the value of real property: a sales comparison, a replacement cost calculation and an income approach when rental properties are prevalent.
Cost Approach
Local building costs, the cost of labor and other elements to determine how much it would cost to build a property nearly identical to the one being appraised. This value usually sets the upper limit on what a property would sell for. It's also the least used method.
Paired Sales Analysis
Appraisers looks up recent sales in close proximity to the subject property to find other properties which are comparable to it. These other properties are commonly referred to as 'Comps'. By assigning a dollar value to certain items such as upgraded appliances, additional bathrooms, additional living areas, quality of construction and lot size, we add or subtract from each Comp's sales price so that they are more accurately in line with the features of subject property.
- For example, if a Comp has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the Comp.
- If the subject property has an extra half-bathroom and the Comp does not, the appraiser might add an amount to the Comp
The sales comparison approach to value is typically given the most weight when an appraisal is for a real estate sale.
Valuation Using the Income Approach
Approach to value is sometimes applied when an area has a measurable number of renter occupied properties. In this scenario, the amount of revenue the real estate produces is taken into consideration along with income produced by comparable properties to give an indicator of the current value.
Reconciliation
After analyzing the data from all approaches, the appraiser is estimates the market value for the subject property. The estimate of value shown in the appraisal report is not always what's being paid for the property, even though it is likely the best indication of a property's market value. Depending on the individual situations of the buyer or seller, their level of urgency or a buyer's desire for that exact property, the closing price of a home can always be driven up or down. Regardless, the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property would likely sell for in an open marketplace.
Experience and familiarity with the subject property's real estate market if critical to completing an accurate appraisal. With over 19 years experience in Cook and the surrounding counties, JM Real Estate Service is second to none when it comes to determining a fair and balanced property value so you can make wise real estate decisions.