It’s not a banking jargon, nor a term only known to real estate agents. You’ve probably heard it a number of times already yet still wonder with some degree of youthful curiosity, “What does appraisal exactly mean?”
An appraisal is a stated result of valuing a property, making a cost estimate, or forecasting earnings, or a combination of two or more of these. Technical definitions aside, appraisal is simply an estimate or opinion of value. It defines the worth, usefulness or utility of an object just so that you can make the most out of your finances.
Sounds simple eh? But what might look like as a simple act of giving valuation to a certain property is actually one of the most valuable tools of real estate gurus and investors.
To real estate experts, getting a very reliable appraisal is just as important as a decisive reconnaissance for the marines or a thorough window-shopping-day for shopaholics. Information is — and will always remain as — the most powerful tool in the world of investments. And the information that an appraisal provides might just spell the difference between a very good investment, and a disastrous money-wasting move.
You definitely want to get the most out of your bucks, and there’s no better way than looking into an appraisal so you’ll know where your money can flourish efficiently.
However, the thing is, before one can actually get a very good appraisal, there are steps that need to be taken, which brings us to our next query:
How is Real Estate Appraised?
The Market Data Approach — The single universal approach to appraising real estate is called as the Market Data Approach, or otherwise known as the Sales Comparison Approach. It is a process of carefully comparing and relating comparable properties to a subject property being appraised. To do this, the appraiser has to rely heavily on market data, hence the name of the approach. Adjustments are made of course, to suit to slight differences between these properties. Such adjustments can be based on the comparison of certain factors such as size, shape, location and time element.
Despite its straightforward approach, simplicity and wide acceptance, the Market Data approach has no provision for alternate techniques. In cases where valid sales are not recorded, insufficient, or undisclosed, the absence of market data renders the entire approach as incapacitated.
The Cost Approach — The Cost Approach to appraising utilizes three logical steps.
- First, the land value is estimated.
- Second, careful inspection is undertaken to estimate the replacement cost and accrued depreciation.
- The final step is to correlate these estimates into a value estimate.
To put it in rather simpler terms, the cost approach is an estimate of the investment required to duplicate the land in its present condition.
The Income Approach — The Income Approach is best used for commercial properties, or investment properties that can generate income from rents or leases. In simple term, this approach arrives at the appraisal value of a property on the basis of its opportunity cost. This method of appraisal is produced by comparing the net income to be earned by the property if it is fully utilized versus its remaining useful life with the possible income earned if the amount used to purchase it were too used for any other income-producing venture with the same comparable risk.
Among all the approaches to appraisal, this approach is the most technical and requires an adequate amount of data. The complexity of the method too, makes the appraisal that arrives from it a very detailed appraisal.
Where To Find A Real Estate Appraiser?
Unlike, real estate brokers and agents who are scattered all over the place, real estate appraisers a little bit shy, preferring the comfort of office more than the real action in the field of sales. Of course, they are not salesmen, unlike their buddies Mr and Ms Brokers.
Banking institutions, investment firms, even private companies engaged in real estate transactions have a team or two of appraisers. These institutions usually provide appraisal services for their regular clients as a standard operating procedure, which is pretty much logical because the presence of appraisers protects the investment of these institutions by providing a sound basis for investment.
Freelance appraisers can also be called into action as the need arises. However, these freelance appraisers may not be holding enough data that are needed to complete a reliable appraisal. So it would be wiser to get somebody from a well established institution so you can avail of a very reliable and trustworthy appraisal.
“Real Estate Appraisal — Don’t Invest Without It” is written by Randolph Reserva.