Definition
Appraisal Process
The appraisal process, also known as the valuation process, is a thorough methodological approach that appraisers use to determine the market value of a real estate property. This process typically includes collecting and analyzing relevant data, inspecting the property, and comparing it to similar properties recently sold in the area. The purpose of an appraisal is to provide an objective analysis that helps buyers, sellers, lenders, and other stakeholders make informed decisions regarding real estate transactions.
Steps Involved in the Appraisal Process
- Definition of the Problem: The appraiser identifies the nature of the property and the purpose of the appraisal.
- Scope of Work: Determining the extent of research and analyses necessary for the appraisal.
- Data Collection and Property Inspection: Gathering general data such as economic, regional, city data, and specific data such as the site, improvements, and comparable properties.
- Data Analysis: Analyzing the highest and best use, and performing market, cost and income analyses.
- Land Value Opinion: Estimating the value of the land.
- Application of the Approaches to Value:
- Sales Comparison Approach
- Cost Approach
- Income Capitalization Approach
- Reconciliation of Value Indications and Final Value Estimate: Combining the value indications into a final value estimate.
- Report of Defined Value: Communicating the approximation of the property value as a formal appraisal report.
Examples
- Residential Property Appraisal: Before selling a house, an owner hires a professional appraiser who inspects the property, compares it with recently sold similar properties in the locality, and determines its current market value.
- Commercial Property Appraisal: A company planning to acquire an office building hires an appraiser to evaluate the property using income capitalization approach along with sales comparison and cost approaches to determine a fair purchasing price.
Frequently Asked Questions
What factors influence property appraisal?
The appraisal is influenced by factors such as location, size, condition, age, renovation improvements, design, local market trends, and comparable sales.
How long does the appraisal process take?
The appraisal process typically takes between one to two weeks, depending on the complexity of the property and the current workload of the appraiser.
What is the cost of an appraisal?
The cost of a property appraisal ranges from $300 to $600 for residential properties and can be significantly higher for commercial properties.
What is a comparable sale?
Comparable sales, or “comps,” are similar properties in close proximity to the subject property that have recently sold and are used for comparative analysis during the appraisal process.
What is a final value estimate?
A final value estimate is the appraiser’s conclusion of the property’s market value, derived from reconciling the values from different assessment methods.
Related Terms
Market Value
The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller.
Cost Approach
A real estate appraisal method that estimates the price a buyer should pay for a piece of property is equal to the cost to build an equivalent building.
Income Capitalization Approach
An appraisal method used for commercial properties, which calculates value based on the income a property generates.
Sales Comparison Approach
This method compares a property to other recently sold properties with similar characteristics.
Online Resources
- Appraisal Institute
- International Valuation Standards Council (IVSC)
- The Appraisal Foundation
- American Society of Appraisers
References
- Appraisal Institute. (2020). “The Appraisal of Real Estate”, 15th Edition.
- International Valuation Standards Council (IVSC). (2020). “International Valuation Standards”.
Suggested Books for Further Studies
- “Real Estate Valuation and Strategy: A Guide for Managers” by John Williams
- “Fundamentals of Real Estate Appraisal” by William L. Ventolo and Martha R. Williams
- “Modern Real Estate Appraisal: Theory and Practice” by John Hall Orell and S. Howard Hanson
