The ins and outs of Real Estate Appraisals



A real estate appraisal is defined as a written judgment of real estate value as of a specific date. When prepared by a qualified appraiser, the real estate appraisal constitutes as an independent and unbiased analysis of all pertinent information. You might ask yourself whether the cost of an appraisal is actually worth it? After all, can’t one just go by the market value?

The answers to these questions is that appraisals are highly important for any real estate investor as they are usually required each time a property is sold, taxed, insured or financed. While the appraisal may include pictures, sketches and maps, you must ensure that it contains all facts and analyses pertinent to the property in question, the neighborhood, and the market in general.

There are three main approaches to appraising the value of real estate. When dealing with properties that have incurred new improvements which represent the best use of the land, or when unique improvements are located in the market, it is advised that you use the Cost Approach. What the cost approach says is that the purchaser would pay an amount that is no more than the cost of producing a substitute property with the same utility as the subject property. Basically this means that the cost approach involves estimating the reproduction costs of the new improvements, and then subtracting accrued deprecation charges. Following this, the market value of the land found by Direct Sales Comparison is added to it.

If on the contrary, an active market provides sufficient data which can be verified, it is better to opt straight for the Direct Sales Comparison Approach. This approach basically advocates that an informed purchaser would pay an amount that is no more than the cost to him of acquiring an existing property, which offers the same utility as well. To use this approach, you will need to compare the data on the subject property with the actual sales figures of similar properties, while analogously ensuring that appropriate adjustments are made in the case of any discrepancies. Additionally, you should know that various units are developed, which when applied to like units of the subjects, give an indication of property’s value.

Meanwhile, if you wish to find out about the future benefits arising from property ownership, you should turn to the Income Approach as it involves converting anticipated benefits from a property’s ownership into quantifiable estimate. The benefits are estimated by deducting fixed and operating expenses from the potential gross annual income, arriving at the net operating income, which in turn is required to attract capital to the property.

You can choose any of the methods mentioned above when creating your appraisal. However, it is highly recommended that you use all three approaches and then correlate their values into a single value. Therefore, you will be able to benefit from the best of all the approaches.