All about Real Estate Appraisals

by Nathan Toler

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.

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