What is an appraisal?
Although there is no standard accepted definition of the word “appraisal”, the following can be used as a guideline: “An appropriately supported objective and unbiased opinion of the value, as of a specific date, of an adequately and accurately described property, made by a qualified person who has no undisclosed interest in the property”.
In the simplest terms, an appraisal is an opinion of value. When that opinion is formed by a trained and qualified appraiser, it is based on a systematic process of defining and planning a solution to the appraisal problem, gathering and analyzing all necessary information, applying the approaches to value, and reconciling all of that analysis and data into the opinion of value. This opinion can be stated in the form of a single value or a value range. In arriving at a value opinion, an appraiser will consider several methods of appraisal application that approach the concept of property value from different perspectives. These methods are referred to as the “approaches to value” and are the cost approach, market approach and income approach.
A home purchase is the largest, single investment most people will ever make. Whether it’s a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off. Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer. So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid. This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay – or a seller receives –
The Uniform Standards of Professional Appraisal Practice (USPAP) defines an appraisal as “The act or process of developing an opinion of value; an opinion of value.” This opinion or estimate is arrived at through a formal process that typically uses the three “common approaches to value”. They are the Cost Approach-which is what it would cost to replace the improvements, less physical deterioration and other factors, plus the land value. There is the Sales Comparison Approach- which involves making a comparison to other similar nearby properties which have recently sold. The Sales Comparison Approach is normally the most accurate and best indicator of value for a residential property. The third approach is the Income Approach, which is of most importance in appraising income producing properties-it involves estimating what an investor would pay based on the income produced by the property.
