APPRAISAL OVERVIEW
What is an Appraisal?
An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, vacant land and farms. The reasons for performing a real property appraisal are just as varied. They are usually required whenever real property is sold, mortgaged, taxed, insured, or developed. We have experience performing appraisals to assist with mortgage lending purposes, potential sale or purchase, negotiation between buyers and sellers, estate planning/estate tax, divorce settlement.
THE Appraisal Process
We begin each appraisal assignment with a physical inspection of the property. Our duty is to inspect the property being appraised to ascertain the true status of that property. During the inspection we look for features such as the current land use, the lay and slope of the terrain, quality of fence lines or and improvements on the property, the condition and location of any water sources, and so on.
For residential appraisals we inspect the quality and condition of the home and look at features such as the number of bedrooms, bathrooms, the location, 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 mapping and sketching the property, ensuring the acreage and square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the property.
Once the property has been inspected, the appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental or income producing property, an income approach.
The Cost Approach estimates value based on the typical cost of materials and labor necessary to build a structure of similar size and quality in that location while accounting for depreciation due to age and condition. The Sales Comparison Approach estimates value based upon the price, in the local market, necessary to acquire a property of similar location, quality, size, age, and condition. The Income Approach estimates value based upon typical market income of a similar property.
APPROACHES TO VALUE
CoSt Approach
In the cost approach to value, the cost to acquire the land plus the cost of the improvements minus any accrued depreciation equals value. Depreciation is a loss in value from any cause, and can take the form of physical deterioration, functional obsolescence, or economic obsolescence. The underlying premise of the cost approach is that a potential user of real estate won't, or shouldn't, pay more for a property than it would cost to build an equivalent.
Sales Comparison Approach
The sales comparison approach is directly rooted in the real estate market. The value of the subject property is equal to the sales prices of comparable properties plus or minus any adjustments. The sales comparison approach compares a piece of property to other properties with similar characteristics that have been sold recently. The sales comparison approach takes into account the affect that individual features have on the overall property value, meaning that the total value of the property is a sum of the values of all of its features.
Income Approach
The income approach quantifies the present worth of future benefits associated with ownership of the real estate asset. The income approach comes in two different forms: net income approach and gross income approach. Net income is what is left over after vacancy and collection loss and allowable expenses have been subtracted from the potential gross income. The net income is divided by a capitalization rate (the investor’s desired rate of return) for an estimate of value. In the gross income approach, the income is multiplied by a factor in order to arrive at the value.