Now I know what you're thinking - you don't need an appraisal: extra cost on the whole transaction (it's not as expensive as you might think) just to see that maybe you were right all along. But what if you weren't right and you just lost a big pile of cash?
This can happen to both sellers and buyers: sellers underestimate the property value and sell lower and buyers overestimate, sometimes going overboard with prices!
Ok, now let's see what an appraiser does and how he/she does it:
An appraiser's job is to interpret many types of market value such as fair market value, insurance value, tax value and value in use and then place an estimated price on the appraised property.
Some of the commonly used methods in appraisal:
1. The cost approach (also known as summation approach) is the land value, plus the cost to reconstruct any improvements, less the depreciation on those improvements.
2. The sales comparison approach looks at other similar properties in the same area and derives an approximate price from that comparison. This is one of the most used methods of appraisal because it's very reliable, but only if there were other comparable sales.
3. The income capitalization approach (or simply the income approach) is used for commercial and investment properties. This approach takes an income stream and uses it to estimate a value - either by using revenue multipliers or single-year capitalization rates of the net operating income.
Out of the 3 methods above the second, the sales comparison approach, is the most widely used for real estate appraisals because of it's reliability.
And now we get to the real question: when the seller gets an appraisal value that is less than he expected, what is to do?
* You can lower the price. I know it isn't what you want to hear, but sometimes it just comes to this. Buyers will sometimes back off if you don't lower the price, so decide if you want to sell at a loss or risk waiting more and probably getting the same kind of deal.
* If you made a very good impression on the buyer you can actually push it and hope for the best. Some will give in if the difference in price isn't that big, so try to "read" the buyers a bit and see what happens.
* Negotiate with the buyer and maybe you'll both meet in the middle - if everybody gives in a little you may come to an agreement.
* Ask for another appraisal! Yes, this is one very good option; don't forget, an appraisal is an evaluation that gives a very good approximation of value - but it's still and approximation. Other appraisers may come up with different values.
However, the most likely scenario is that the outcome will be in your favor - you just don't want to take the chance of losing a pile of cash! Get an appraisal now!
