What is a Real Estate Appraisal?

A real estate appraisal is an opinion as to the value of property. Whenever a loan is obtained for the purchase of property federal regulations require the lender, or its agent, to have an appraisal of the property ordered. The purpose of the appraisal is to determine if the property is sufficient collateral for the loan being obtained. The scope of work performed by the appraiser usually depends on the type of appraisal ordered by the lender, to include any lender-specific requirements requested as well. An appraisal can include an inspection of the interior and exterior of the property, research of county of city records, research of multiple listing service (MLS) records, review of recent sales and listings of comparable properties in the market area, and review of other data and documentation regarding the subject property and market area. An appraisal should not be confused with a home inspection, which is an in-depth analysis of your home identifying all the potential issues.

Typically, in an appraisal one should expect to find information regarding the following:

          • A description of the appraised property
          • The appraiser's opinion as to market value
          • The effective date of the value
          • Relevant characteristics of the property
          • Comparable sales used for assessment purposes
          • Any other data or analysis used to support the appraiser's opinion of value
          • Comments explaining important issues in the appraisal (if necessary)

There are several different approaches to real estate appraising that an appraiser may use. The sales comparison approach uses an analysis of recent sales to find comparable properties (based on the characteristics of the property) and determine what the market value of the property may be. This is often the primary approach used by an appraiser. The cost approach is another approach utilized that assesses the replacement cost of reconstructing the property, less any depreciation, plus the value of the land. The cost approach can be a worthwhile approach in assessing newer homes that have little or no depreciation. Another approach to real estate appraising is the income approach. The income approach is often used in the appraisal of property with multiple units. Generally, the income approach is only used where income production is a factor in the decision-making process of a buyer or seller and is not used in the assessment of single-family dwellings.

A borrower will not hire or schedule an appraiser and will receive a copy of the appraisal at least three days prior to closing. The appraisal fee will then typically show as a line item on the closing documents and the borrower will pay that fee as part of their closing costs. An appraiser is expected to maintain independence and provide an impartial and objective opinion as to the value of property. Not only is this important to the credibility of the appraiser's report, but it is also required by federal and state regulations.

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Thursday, 17 June 2021