What Is
A Real Estate Appraisal and Why Do I Need One?
A real estate
appraisal is the valuation of the rights of ownership. The real
estate appraiser must define the rights he or she intends to appraise.
The appraiser
does not create value, the appraiser interprets the market
to arrive at a value estimate. As the appraiser compiles
data pertinent to a report, he or she must give consideration
to the site and amenities, as well as the physical condition of
the property. A real estate appraiser may spend only a short time
inspecting the property, however, this is only the beginning.
Considerable
research and collection of general and specific data must be accomplished
before the appraiser can arrive at a final opinion of value.
Due to the
many types of value, such as Fair Market Value; Insurance Value;
Tax Value and Value In Use, the need to precisely define the purpose
of the appraisal is essential.
Real Estate
Appraisal Methods
The real estate
appraiser's opinion or estimate is derived by using three common
approaches, all derived from the market. They are:
- Cost
Approach to value — what it would cost to replace
or reproduce the improvements as of the date of the appraisal,
less the Physical Deterioration, the Functional Obsolescence
and the Economic Obsolescence. The remainder is added to the
Land Value.
- Comparison
Approach to value — makes use of other "benchmark"
properties of similar size, quality, and location that have
recently been sold. A comparison is made to the subject property.
- Income
Approach to value — of primary importance in ascertaining
the value of income-producing properties; has little weight
in residential-type properties. This approach provides an objective
estimate of what a prudent investor would pay based upon the
net income that the property produces.
Then, after
thorough analysis of all general and specific data gathered from
the market, a final estimate or opinion of value is correlated.
When to Order
a Real Estate Appraisal
There are
many reasons to obtain an appraisal. Appraisals are not strictly
limited to real estate transactions, they can be used for mortgage
transactions too. While these are the two most common uses, here
is a list of other reasons why you may need to order an appraisal:
- To obtain
a loan
- To lower
your tax burden
- To establish
the replacement cost of insurance
- To contest
high property taxes
- To settle
an estate
- To help
you make one of the largest financial decisions in your life
- To provide
a negotiating tool when purchasing real estate
- To determine
a reasonable price when selling real estate
- To protect
your rights in a condemnation case
- To allow
you to obtain a qualified appraisal report
- A government
agency, such as the IRS, requires it.
- You are
involved in a lawsuit
Nathan
Toler is Vice-President of Internet Operations for Sharp Mortgage
Group, a zero-down home mortgage specialist. Click here for more
information on the mortgage
process and about
VA home loans. |
