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Appraisal FAQs

What is an appraisal?

Purchasing a home is the largest, single investment most people will ever make. It also is a complex financial transaction that involves collaboration among several important partners. First, there are the buyer and the seller. They want a fair, smooth transition of the property with no hidden surprises. Then there is the realtor, who serves as the liaison between the buyer and seller. The mortgage company or bank provides the financial capital for transfer of the property. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer. And finally, the appraiser ensures all parties that the value of the property is commensurate with the amount being paid.

An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receive - for a parcel of real estate. The knowledge and experience of a certified, professional appraiser provides them with the most accurate estimate of the true value of the property.

The Inspection

A professional appraisal starts with the inspection. The appraiser inspects the property to determine the true status of that property. The appraiser personally examines the physical features of the property, such as the number of bedrooms, bathrooms, and the location. This ensures that the physical features really exist and are in the condition a buyer would expect them to be. The inspection often includes a sketch or photo of the property as evidence of the layout of the property, square footage and specific features - or defects - that would affect the value of the house.

After the property has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.

Cost Approach

In a “cost approach”, the appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value usually sets the upper limit on what a property would sell for. Of course, there are times when a property can sell for more that the appraised cost. The property may be in a highly desirable location, or have certain features, such as a beautiful view from the family room, that increase its value to buyers.

Sales Comparison

In the “sales comparison” approach, the appraiser considers the value of certain features to the residents of an area. These can include neighborhood features, such as traffic, schools, and noise, as well as certain features of the property, such as extra bathrooms, fireplaces or hardwood floors. Using background knowledge on recent sales in the vicinity of the property, the appraiser then “compares” the value of the property to the value of those recent sales. Comparable properties, with comparable features, serve as a good indicator for appraising the current value of a property. In a sales comparison, the appraiser, adds to or subtracts from a property’s value for features that are present or lacking in recent sales in comparable properties.

Income Approach

In the case of income producing properties, such as rental houses, the appraiser may use the amount of income the property produces to determine the current value of those revenues over the foreseeable future.

Reconciliation

Combining information from a cost approach, sales comparison and possibly an income approach, the appraiser then determines an estimated market value for the property. This appraised value is often used as a benchmark for lenders who don't want to loan a buyer more money than the property is actually worth. That doesn’t always mean that the appraised value is the selling price. There can be mitigating factors, such as the seller’s motivation, or ''bidding wars'' among buyers, that can affect the final price.

The bottom line is that an appraiser’s role in any real estate transaction is to determine an accurate property value, so that all the partners in the transaction are able to make informed real estate decisions.

 

Franken Appraisal Service, LLC
P.O.Box 44276
Madison, WI 53744

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