What is a Real Estate Appraisal?


Real estate appraisal is the process of estimating the value of a property for sale, purchase, refinance, loans or insurance purposes. The appraisal typically reflects the property's market value. A real estate appraiser is trained to know the market value of real estate that he or she is evaluating. Mortgage lenders use this value before extending credit to a client for a mortgage loan.
 

What are the Three Main Methods of Appraising?

There are three methods of appraising a property: Comparative Sales Approach, Cost Replacement Approach and the Income Approach.

Comparative Sales Approach: The real estate appraiser evaluates the recent sales of property in the area. After evaluating comparable properties and prices, the real estate professional can make an assessment of the value of the property and determine its market value.

For instance, in the comparative sales approach, the appraiser looks for properties with similar age, square footage and building materials that have sold in the past three months. These houses may have sold for approximately $550,000 each. The appraiser then compares the house on what is offered.

The appraisal property may have a three car garage, while the comparative properties may have single car garages. The appraiser may value the appraisal property higher because it has a three car garage instead of a single garage. For instance, the appraiser may value the appraisal property at $575,000.

Income Approach: This method of valuation typically applies to commercial and rental properties. The appraiser determines the amount of income the property is producing and the potential income that the property can produce. After this determination, the appraiser factors in the costs of maintaining the property and subtracts any expenses from the income. The appraiser will then have an average or monthly net income for the property.

A rental property may be capable of an income of $2,000 per month. The client may have an average of $500 in property expenses monthly. This property yields a total income of $1500 monthly or $18,000 annually. If the property has a return of investment for 15 years, then the appraiser will value the property at $270,000.

Cost Replacement Approach. Using this approach, the appraiser determines the cost of rebuilding the home with comparable materials. The appraiser will determine a figure and then a pre-determined amount for depreciation. This amount will be based upon the age and condition of the property.

For example, a client may have a three bedroom house that would cost $275,000 to replace, if comparable materials are used. After taking into account depreciation of the property, the real estate appraiser may depreciate items such as the roof that may be at the end of its life. The market value of the home will then become $250,000, after $25,000 is deducted for depreciation.

Conclusion

Real estate appraisers are an instrumental tool in the home buying process. They are necessary for establishing value, equity and rental income. Clients should find a reputable real estate appraiser that will provide you with a fair deal.

Finding out the current market value estimation of your property in Erin, Georgetown or Milton is easy. We would be more than happy to help. Contact Us Today!