What is an appraisal?
An appraisal, or more specifically a real estate appraisal, is a formal estimate of opinion of value supported by an analysis of relevant property sales data. The property being appraised is generally referred to as the “subject property.”
The purpose of the appraisal is to determine the property’s market value, which is the highest price a willing buyer and informed buyer would pay and a willing seller would accept. Market value implies that the property is exposed on the open market for a reasonable time; both parties are familiar with the property’s uses, defects, and advantages, and the parties are unrelated (arm’s length transaction).
In order to prepare an appraisal report, real estate law in the United States generally requires that the appraiser be licensed and follow standard practices set forth from the Uniform Standards of Professional Appraisal Practice (USPAP). The USPAP are federal standards adopted by Texas and apply to all appraisals. The law also requires that compensation tied to an appraisal must be in the form of a fee and not based on a percentage.
There are several appraisal methods for evaluating a property. The most common one is the sales comparison approach, which is very similar to what real estate agents use for a comparative market analysis or CMA. The sales comparison approach uses market data or comparable sales, making adjustments for market conditions, improvements, square footage, and sales activity.
The sales comparison approach is especially useful when evaluating residential property such as homes. For unusual homes (high end), commercial property, agricultural and industrial property, other appraisal methods are needed in order to properly evaluate these property types.
Appraisal methods include:
Sales comparison approach – this method is very similar to a real estate agent’s comparative market analysis (CMA), where value is based on neighborhood sales activity, with adjustments being made the condition of the home, square footage, and other physical features.
Cost approach – This method takes into account what the cost would be to build a replica of the same property, deducting for depreciation of the present age of the subject property, and then adding back in the land. This method is especially useful for a courthouse, school building or historic property.
Methods of estimating to build new include the quantity survey method, the unit-in-place method and the comparative-foot method. These take into account the component parts that go into the construction of a property. The unit-in-place method looks at component parts such as the kitchen, roof, walls, whereas the quantity survey method takes into account individual component parts such as nails, actual materials and quantities used of each material.
Income approach – This method is used for income producing property such as commercial property. Since commercial property is income-producing property, an investor will generally buy this property for the cash TXows.
An appraiser will generally use multiple appraisal methods to arrive at a property value, as a check against another method. An appraisal report can be from 50 to 100 pages, and for commercial property, even longer. It will provide facts and figures along with written descriptions of the appraisal method used, the neighborhood, photos of the subject property, etc. A house appraisal can cost from $200 to $500, but will average around $350.
Mortgage companies use appraisals when underwriting loans to validate the value of a new loan for a property. If the appraisal is less than the selling price of the house, a buyer might have to write a check for the difference, walk, or ask the seller to accept less money for the house.