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What is an Appraisal?

An appraisal is the act or process of developing an opinion of value. An opinion of the estimated market value as of a specified date which is performed by a certified or licensed Appraiser.

Definition of Market Value

A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the terms identified by the appraiser as applicable in an appraisal. The monetary worth of a property, good or service to buyers and sellers at a given time. The present worth of the future benefits that accrue to real property ownership.

Developing the Opinion of Value

The Inspection

An Appraisers responsibility is to inspect the property (subject) being appraised. The Appraiser inspects such features as the overall condition of the property, bedrooms, bathrooms, basement and garages in any, location and so on. This is a major part of the appraisal process for reporting requirements. The inspection
also includes a sketch and photos. The sketch ensures the gross living area (GLA) and the layout of the improvements. The Appraiser must take into account and flaws and/or defects that would affect value. The Appraiser then decides what approaches are necessary to determine the opinion of value: the Sales Comparison Approach, the Income Approach and/or the Cost Approach.

The appraisal should not be relied on as a home inspection. The Appraiser is not a home inspector.

Sales Approach

The sales comparison approach to value is an analysis of comparable sales, contract sales, and listings of properties that are the most comparable to the subject property. The sales prices of these properties are used to begin the analysis. By using their knowledge in the market area the Appraiser may make upward and/or downward adjustments comparing the comparable to the subject. Such adjustments may include differences in GLA, overall condition, basements, garages and so on.

Income Approach

The income approach is predominately used for income producing properties such as multi-family or investment units that are rented or leased. The appraiser will develop an appropriate gross rent multiplier (GRM) or capitalization rate to arrive at a value via the income approach.

Cost Approach

The Appraiser uses local building costs to value the subject “as if” new and then depreciates the improvements as to overall condition and age. An estimated land value and site improvement is also included. This approach is typically on the higher side and in most cases lends additional support when used for properties that are relatively new and/or new construction.

Reconciliation

The final step in the appraisal process is to consider and analyze the relevance of the approaches used in relation to the subject property and the reliability, quality and quantity of the data used in the approaches to value. While there is not a specific formula to valuation when using reconciliation, values are considered and are part of the process to come to the total estimated value.

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