Real Estate Appraisal

Real estate appraisal is a process of estimating the value of a real estate property. The appraisal is done by a licensed or certified appraiser, and is usually based on the market value. The appraisal document is one of the most important papers involved in a real estate transaction.

The process of a real estate appraisal starts with the inspection of the property. The appraiser then ascertains the value of that property considering the structure of the building, the features of the house, the location of the property, and so on, and ensures that they really exist and are available in the condition a reasonable buyer would expect it to be. The inspection includes sketching the property, ensuring the proper square footage and conveying the layout of the house. The appraiser also looks for any obvious defects that would affect the value of the property.

There are few common types of value estimates for a real estate appraisal.
Market value is the most probable price in open market under all conditions required for a fair sale.
Value in use, also known as the net present value is the cash flow generated from that asset for a specific use.
Investment value is the value of the property to a particular investor.
Insurable value is the value of the property covered by an insurance policy.

Once the property location is inspected, an appraiser uses two or three approaches in determining the real estate property value and they are cost approach, sales comparison approach and income approach in the case of a rental property.

Cost Approach: The appraiser determines the cost required to construct the property that is being appraised. He uses information like the building costs, labor rates and other costs involved in the construction of the property. This value is often set at an upper limit on what a property would get sold for.

Sales Comparison Approach: Here the sales of properties adjacent to the property and similar in construction are compared and analyzed and the sales value of the subject property is determined. The sales comparison approach is usually considered the most reliable and serves to determine the reasonability of sales price.

Income Approach: This approach is done when the property is potential to provide income. They are generally used to value commercial and investment properties. In this case the rental income the property produces is used to derive the appraisal amount.

Once the evaluations on the three approaches are completed, reconciliation is done. All the appraised value is combined and then the appraiser stipulates an estimated market value for the property in the real estate appraisal. This real estate appraisal amount is the best indication of the property value. However, it may not necessarily be the final sales price. The mitigating factors like the seller urgency or bidding may get the final price up or down.

The real estate appraisal value is used as a major guideline for lenders who would not prefer to loan a buyer more money than what the property is actually worth for.