What is an appraisal

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A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second home, or an investment property, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all together.

The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.

A Real Estate Appraiser provides an unbiased estimate of what a buyer might expect to pay - or a seller receive - for a parcel of real estate, where both buyer and seller are informed parties. The APPRAISER is contracted to provide the most accurate true- market-value estimate of the property. An appraisal will more than likely be required for mortgage refinancing as well. Computer generated AVM's and realtor-provided CMA's are not as reliable as an appraisal nor are they legally binding.

The Inspection
It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true condition of that property. The appraiser must actually see features, such as the number of bedrooms, bathrooms, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the premises, noting the proper square footage while conveying it's room layout. However, the sketch is not an architectural rendering and it is offered for illustration purposes only. Lastly, and most importantly, the appraiser looks for any obvious features or defects that would positively or adversely affect the value of the appraised property.

Once the site has been inspected, an appraiser uses two or three approaches to determine the value of the real property: a COST APPROACH, a SALES COMPARISON APPROACH, and, in the case of a rental property, an INCOME APPROACH.

Cost Approach
In the 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 often sets the upper limit on what a property would sell for.

Sales Comparison
Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as square footage (GLA), extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately depict the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

Income Approach
In the case of income producing properties - rental houses for example - the appraiser may use an Income Approach to determine the value of the property. In this case, the amount of income the property produces, or has the potential to produce, is used to aid in the determination of the current value. 

After scrutinizing the information from all applicable approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency, or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.