Preparing an Appraisal Report is an Important Part of a Real Estate Transaction.
In general, a real estate appraisal helps to establish a real property’s market value–the likely sales price it would bring if offered in an open and competitive real estate market.
Chartered banks and any other lender will require an appraisal report when an applicant ask to use a home or other (real estate) as security for a loan, because they want to make sure that the property will sell for at least the amount of money it is lending.
Some times the average consumer confuses a comparative market analysis, or CMA, with an appraisal.
Real estate agents use CMAS to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price with their CMAS, but an appraiser’s report is much more detailed, and is the only valuation report a bank will consider when deciding whether or not to lend the money. The reason is that an appraiser will prepare the report only on the recent market evidences that can support a final value but realtors are using their market sense and active listings to arrive a listing value which is different than appraised value.
What is on a Residential Appraisal Report
Appraisals are very detailed reports, but here are a few things they include:
- Details about the subject property, along with side-by-side comparisons of minimum three comparable properties.
- A brief evaluation of the overall real estate market in the area.
- Statements about issues the appraiser feels are harmful to the property’s value, such as poor maintenance of the property.
- Notations about seriously flawed characteristics, such as a visually detected faulty foundation.
- An estimate of the average sales time for the property.
- What type of area the home is in (a development, stand alone acreage, etc.)
There are two common appraisal methods used for residential properties:
Sales Comparison Approach
The appraiser estimates a subject property’s market value by comparing it to similar properties that have sold in the area. The properties used are called comparable, or comps.
No two properties are exactly alike, so the appraiser must compare the comps to the subject property, making paperwork adjustments to the comps in order to make their features more in-line with the subject property’s. The result is a figure that shows what each comp would have sold for if it had the same components as the subject. The adjustment amounts come from various statistical data.
Cost Approach
The cost approach is most useful for new properties, where the costs to build are known. The appraiser estimates if the cost to build is aligned with a sales data in the neighborhood.