What is an appraisal?

A home purchase has often been described as the greatest, single investment most people will ever make in their lives. Purchasing your primary home, a vacation home or an investment property involves many different professional people to complete the transaction. Among those involved in the transaction include the real estate agent/broker, the mortgage company or bank (lender/processor), the title company and/or attorney and, of course, the seller and buyer. Building inspections and surveys, too, are often an integral part of the sale.

It is the appraiser, often hired by the lender, who estimates the value of the property to ensure the value is representative of the price being paid. This is important to both lender and buyer. The lender must know if the value is there to protect their loan and the buyers must know if they are paying too much.

The appraiser provides the appraisal. An appraisal is the act or process of estimating value. It is an opinion of value; it does not establish the value of the real estate. The interaction of buyers and sellers in the market establish value. Appraiser?s opinions are based on research of the appropriate market, assemblage of data and the application of appropriate analytical techniques. This is all combined with the appraiser?s knowledge, experience and professional judgment. Do not confuse a CMA (comparative market analysis provided by a real estate agent) with an appraisal. CMAs are prepared to help sellers to determine a realistic asking price. Appraisals are much more detailed and are typically what lenders will use to decide on whether or not to lend money.

Appraisals are very detailed. Some of the items included are:

  1. Identification of the subject property including address, legal description and property ID number.
  2. Information regarding the contract for sale properties.
  3. Neighborhood description and comments regarding stability, housing trends, price ranges, land use, boundaries and market conditions in general.
  4. Site information including dimensions and size of lot, zoning and compliance, utilities provided and flood zone information.
  5. Information describing the home and improvements, e.g. gross living area, number of bedrooms and bathrooms, style, age, condition and quality of construction, car storage and additional structures and amenities.
  6. Additionally, a comparable sale comparison grid is also provided. The grid compares comparable sales with the subject property. Adjustments are made to reflect differences between the comparable sales and the subject. After adjusting the comparables, they provide an indication of the value for the subject. The appraiser then reconciles these indicated values to provide an estimate for the subject property.
  7. Also included, if relevant, is the Cost Approach whereby the replacement cost new of the structure less any depreciation is estimated and added to the value of the site. If the home is new or newer the Cost Approach is generally relevant. If the structure is older, depreciation is often difficult to estimate and the approach becomes irrelevant.
  8. The appraisal report typically includes exterior and interior pictures of the subject and exterior pictures of the comparables. Other exhibits might include a sketch of the home depicting the floor plan, flood map, site plan and location map of the subject and comparable sales.
  9. Finally, certification and limiting conditions statements plus the scope of work completed are included.