A real estate appraisal is a formal way of determining a property's fair market value, referred to as the subject property in the appraisal report. When applying for a mortgage loan, the lender usually initiates the appraisal process by ordering it from a list of approved licensed appraisers. However, an appraisal can also benefit sellers or buyers who wish to conduct it independently. Here is an overview of the process and its importance.
The Appraisal Process
Scoping the Appraisal - The appraiser will first identify the property, its intended use (e.g., financing, estate valuation), and the effective date of the appraisal.
Research and Data Collection—The appraiser gathers information about the property, including size, features, condition, and location, and then researches recent sales of similar properties in the area, considering factors like size, features, and overall market trends. These properties are compared to the subject property, and value is given or taken away from them for deficiencies or improvements when compared to the subject property.
Property Inspection—The appraiser schedules a visit to inspect the property's condition, verify details about it, and take photos.
Valuation Analysis - The appraiser will employ different valuation methods using the collected data. These methods include the sales comparison approach (comparing similar properties), the cost approach (estimating replacement cost), and the income approach (considering income potential for rentals). For single-family residential, the comparison approach is most commonly used.
Appraisal Report - The appraiser will compile their findings in a formal report detailing the property's research, reasoning, and final estimated value.
The Purpose of a Real Estate Appraisal:
The primary purpose of an appraisal is to provide an unbiased and professional opinion of a property's value. This is crucial for several reasons:
Lenders - For home purchases, lenders rely on the appraisal to determine how much money to lend the buyer. The appraised value helps ensure the loan amount doesn't exceed the property's worth, protecting both the borrower and the lender.
Buyers and Sellers - Buyers and sellers use the appraisal to understand fair market value. This can guide sellers in setting a realistic asking price and help buyers make informed offers.
Estate Planning and Taxation Appraisals can determine value for estate planning purposes or to calculate property taxes.
Real estate appraisals provide an objective value assessment that ensures fair and informed transactions in the real estate market.
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(c) 2024 Jeff Sorg
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