A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.
Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.
This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receive - for a property, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of the property.
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, the location, views, and so on, to accurately analyze the property from the perspective of an informed purchaser. The inspection often includes a sketch of the property, ensuring the proper 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, an appraiser uses one, two or three approaches to determining the value of real property: a cost approach, a sales comparison and when applicable, an income approach.
In valuing single-family town houses and cooperative and condominium apartments, appraisers typically rely on the sales comparison approach. Our appraisers know the neighborhoods in which they work and understand the value of certain features to the residents of those areas. They are also familiar with specific building amenities and services; proximity to schools, employment centers, medical facilities, parks, public transportation and traffic patterns; and they use this information to determine which attributes of a property will make a difference in the value. In the Sales Comparison Approach, the appraiser researches recent sales in the same building and the influencing vicinity and finds sales of properties that are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Based on the contributory value of certain items such as location, condition, square footage, extra bathrooms, terraces, fireplaces or views (just to name a few), the appraiser adjusts the comparable sales for differences in these items as compared to the subject property. For example, if a comparable property has a fireplace and the subject does not, the appraiser may deduct the contributory value of a fireplace from the sales price of the comparable. If the subject property has an extra full-bathroom and the comparable does not, the appraiser may add the contributory value of a full bath to the sale price of the comparable property for the lack of this feature.
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these factors may not be reflected in the cost approach. This approach is generally not applicable for individual condominium and cooperative units, which typically represent a partial interest in a larger apartment building property.
In the case of income producing properties - 2- to 4-family or apartment buildings for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Individual cooperative and condominium units are not typically purchased for their income generating potential. Additionally, accurate records regarding income and operating expenses for units that have been purchased for this purpose are not publicly maintained or readily available. Therefore, the Income Approach is not generally applied in the valuation of individual cooperative and condominium apartments.
Combining information from all applicable approaches, the appraiser is then ready to arrive at an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not equal the sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may result in a higher or lower sale price. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.