What is an appraisal?
A real estate appraisal is an unbiased professional opinion of a property’s value. Appraisals are often used in purchase and sale transactions as well as refinance transactions. In a purchase and sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location and features. In a refinance, it assures the lender that it isn’t handing the borrower more money than the home is worth.
When you order an appraisal from Pilgrim Colonial Appraisal Services, you will set up a time where one of our licensed or certified appraisers will inspect your property. It is a requirement that the appraiser gathers a first-hand account of the subject property. The appraiser gathers details such as room, bedroom, bathroom count. The type of floorings used, the quality and condition of the home, special characteristics, etc. Often times the appraisal will require that a sketch of the home be in the report. For this reason, you will see the appraiser measuring the property with either measuring tape or a laser. This is added support for the report to illustrate the floor plan and its utility to the viewer. Once the property has been inspected, depending on the intent of the report, there are three approaches when determining the value of the property. Essentially the appraiser is going to use one of these methods to arrive to an opinion of value on a specified date in time. The three different approaches to value are the following:
- The Sales Comparison Approach
- The Cost Approach
- The Income Approach
The Sales Comparison Approach
This is more often than not the most frequently used and widely accepted approach to value in the realÂ estate appraisal practice. The sales comparison approach to value bases its opinion of value on whatÂ similar properties (otherwise known as â€œcomparablesâ€, or â€œcompsâ€) in the vicinity have sold for recently.Â These properties are adjusted for time, acreage, size, amenities, etc. as compared to the property that isÂ being appraised. depending on the subject’s area, locale, acreage, size amenities are adapted to reflectÂ their market. Understanding how the adjustments and to what extent relies on the experience of theÂ appraiser. Often times they use a paired analysis to extract value for certain characteristics. RegressionÂ models are also often used to support these adjustments. Remember that although a certain feature ofÂ your house is worth tens of thousands of dollars, you have to support adjustments with "what is theÂ market willing to pay for this feature. Most often, lenders request and require this approach to value.
The Cost Approach
The second approach in valuing a property is the cost approach. This method is used to determine howÂ much a property would cost to replace (or reproduce) after deducting accrued depreciation. AccruedÂ depreciation the wear and tear of the home over time or the obsolescence. When we say reproduce orÂ reproduction cost, this is used to build an exact replica of the original property. Replacement cost isÂ used if a property is rebuilt with modern day supplies and common building materials used in currentÂ time.
You will often see this approach when appraising a newer home or new construction. Due to accruedÂ depreciation, if a house is very old it is often unreliable to determine an accurate value and for thisÂ reason the cost approach is traditionally not used on older homes.
The Income Approach
The final approach to value is the income approach. This specifically speaks to income generatingÂ properties. This income (or the potential income) helps to support, calculate and identify the marketÂ value of the property. Multi-family homes are examples of income properties.