Real Estate Appraisal: Essential In Property Buying Transaction

Ordering a real estate appraisal is an important step in a real estate transaction. It helps to determine the value (usually, market value) of a real estate. Appraisal is necessary as no two properties are identical; one real estate is bound to differ from another. If you apply for a mortgage loan, then lenders often consider the appraised value of the property before approving your loan request.

Methods used for a real estate appraisal

Real estate appraisal is done in 3 ways, which are described below.

1. Sales comparison approach: In this method, a real estate appraiser estimates a property’s market value by comparing it to comps (similar properties that have sold in the locality). This method is widely used in residential real estate appraisal.

2. Cost approach: This method is used to estimate the cost of building the structure if it gets destroyed. Usually, this approach is used for determining the market value of new properties.

3. Income capitalization approach: This method is used to determine the value of investment and commercial properties. In this approach, a property’s value is determined on the basis of its opportunity cost.

Types of value determined through appraisal

Different types of value are determined through a real estate appraisal. Usually, 5 types of value can be determined through appraisal. Go through the following liens to know what each of these values mean.

1. Market Value: It refers to the price that a seller of a real estate can expect to receive from a property buyer in an open and fair negotiation.

2. Investment Value: Investment value refers to the value of a property to a specific investor. Usually investment value is higher than the market value of a property.

3. Value-in-use: It refers to the value of a property to a specific user. Generally, this value is lower than the property’s market value.

4. Liquidation Value: It is the standard value that is used for bankruptcy proceedings. Liquidation value is analyzed as either ‘forced liquidation’ or ‘orderly liquidation’.

5. Insurable Value: It refers to the value of a real property that is covered by an insurance policy.

How a residential property is appraised

Following are some factors that the real estate appraisers consider while estimating the exact value of a residential property. • Location of the property

• Available public facilities

• Proximity to good schools

• Size and condition of the home

• Size of the plot

• Recent sale price of comps

Facts regarding residential real estate appraisal

Here are 4 interesting facts regarding residential real estate appraisal.

1. Primary mission of an appraisal is to protect lender’s interest. 2. Appraisers look for signs of negligence (such as, cracked walls, damaged flooring) that reduces the property’s value. 3. If a buyer opts for FHA (Federal Housing Administration) insured mortgage, then the appraiser is supposed to survey the physical condition of the property and also disclose the information to the buyer. 4. Real estate appraisal is different from home inspection. In case of property appraisal, a property appraiser formulates an opinion on the value of the property and informs the buyer. In property inspection, a property inspector educates buyer about the condition of the house along with its major components.

Often, real estate appraisers provide inflated appraisals in return for commissions from the lenders. In order to stop this practice, HVCC (Home Valuation Code of Conduct) legislation has come into effect on 1st May, 2009, which is expected to stop the practice of providing inflated property appraisals.