What is an Appraisal?

As defined in USPAP (Uniform Standards of Professional Appraisal Practice), an appraisal is the act or process of developing an opinion of value. It is a systematic procedure an appraiser follows to determine real property value.

If you are the buyer, seller, lender or Realtor® you want to make sure that there is “no money left on the table” at the close of escrow.  Everyone needs to know that an unbiased estimate of value has been determined for the property involved.  This is where a licensed, certified, professional appraiser is needed.

How is the Property Value Determined?

Inspection:
We do an on-site inspection of the property so that we can see the property’s features first hand.  Those features include but are not limited to the location, condition of the property, size (we actually measure the square footage) and we note any defects and/or upgrades.  We then use two or three approaches to determine the property’s value. 

Sales Comparison:
Appraisers who live and work in the area to be appraised are more knowledgeable about the local real estate markets than someone who comes from another area with a completely different type of real estate market.  Just think how different the prices are for Sacramento and the Sierra Foothills than in San Francisco.  Local knowledge makes a big difference in getting an accurate appraisal. 

We have access to recent sales prices of properties in the same area as the property we are appraising.  Researching those sales provides “comparables” and those sale prices are used to begin calculating the subject property’s value.

If the property being appraised has a newly remodeled kitchen and the comparable properties do not, then additional value is added to the property being appraised.   If a comparable property has 4 bedrooms and the property being appraised has 3 bedrooms, then some value is deducted from the property if 4 bedrooms is an important feature in that neighborhood.

Cost Approach:
Basically this means we determine how much it would cost to duplicate/replace the property.  In the cost approach we would not factor in location or amenities.

Income Properties:
For income-producing properties, such as rental homes, the appraiser may use a third approach to valuing the property, the Income Approach.  The amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Reconciliation
Taking into all the information from all the approaches, we then are ready to give the estimated market value for the property.  There may be additional factors such as seller motivation to sell, urgency for the seller to move, bidding wars that could affect the price up or down, however, the appraisal is the best indication of what the property is worth even though it may not be the final sales price.  For lenders the appraisal is the measure they use not to lend a buyer more money than the property is worth.