Appraisal Methods
An appraisal is an opinion of value
or the act or process of estimating value. This opinion or estimate
is derived by using three common approaches, all derived from the
market. They are:
1. Cost Approach to value
is what it would cost to replace or reproduce the improvements as
of the date of the appraisal, less the Physical Deterioration, the
Functional Obsolescence and the Economic Obsolescence. The remainder
is added to the Land Value.
2. Comparison Approach
to value makes use of other "bench mark" properties of similar size,
quality and location that have been recently sold. A comparison is
made to the subject property.
3. Income Approach to
value is of primary importance in ascertaining the value of income
producing properties and has little weight in residential type properties.
This approach provides an objective estimate of what a prudent investor
would pay based upon the net income the property produces.
Home's Market Value
In the real world, very few individuals
order appraisal reports to establish an offering price or to substantiate
a purchase price. At the point that an offer to purchase (in a typical
residential transaction) is made, the price has been set by other
parties, not the purchaser. The price has been determined by the seller,
who wishes to obtain the highest price possible, or the agent, who
receives a percentage of the price as compensation and often represents
the seller in the transaction.
The real estate agent will typically
perform a comparative market analysis (CMA). The appraisal laws in
most states allow real estate agents to perform CMAs without an appraiser's
license or certification. A CMA is a necessary part of the agent's
preparation for a listing and consists of examining sales of properties
in the area to arrive at a listing price. The reliability of the CMA
depends upon the agent's experience and the characteristics of the
property. The agent will suggest a selling price to the seller based
upon the analysis. However, neither the seller nor the agent are bound
by the results of the analysis, and the agent is not required to follow
any formal procedure in completing the CMA. If a seller wishes to
list the property at a price higher than the price suggested by the
agent, then the agent may be forced to accept the listing at that
price or risk losing a commission.
Purchasers believe that they are getting
a good deal if they make an offer lower than the listed price. But
how far above the market value was the property listed? 10%, 15%,
maybe even 20% above the fair market value? A negotiated price of
10% less than the listed price on a property that was listed at 20%
above its value is not a bargain. The agent cannot tell the purchaser
that the offered price is higher than the value, or even higher than
their own CMA. In most states, they must submit the offer to the seller.
The seller of a property may want to
order an appraisal before listing the property. Of course, the cost
of the appraisal is always a deterrent, especially if the seller knows
that a buyer will pay for it when applying for a loan. But the appraisal
is often justified. The seller could lose a sale if the property appraised
for less than the sale price when appraised by the appraiser.
Then, after thorough analysis of all
general and specific data gathered from the market, a final estimate
or opinion of value is correlated.
When To Order An Appraisal
