What goes into an appraisal?

A home or land purchase is the largest financial decision most people may ever encounter. Whether it's where you raise your family, a second vacation home or a rental fixer upper, the purchase of real property is a detailed financial transaction that requires multiple people working in concert to make it all happen.

It's likely you are familiar with the parties taking part in the transaction. The real estate agent is the most recognizable person in the exchange. Next, the bank provides the money necessary to bankroll the deal. Ensuring all areas of the sale are completed and that the title is clear to transfer from the seller to the buyer is the title company.

So who's responsible for making sure the value of the real estate is in line with the amount being paid? This is where the appraiser comes in. As a professional Wisconsin licensed appraiser Brandt Appraisal will provide an unbiased opinion the Fair Market Value for a property, where both buyer and seller are informed parties. 
 

Inspecting the subject property

The first duty at Brandt Appraisal is to inspect the property to ascertain its true status. I must physically see aspects of the property, such as the number of bedrooms and bathrooms, the location, amenities, etc., to ensure they truly are present and are in the shape a typical buyer would expect them to be. To make sure the stated square footage is accurate and convey the layout of the house, the inspection often entails creating a sketch of the floor plan. Most importantly, the appraiser looks for any obvious features - or defects - that would have an impact on the value of the property.

Once the site has been inspected, I use two or three approaches when determining the value of the property: paired sales analysis and, in the case of a rental property, an income approach.

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Sales Comparison

Appraisers are intimately familiar with the communities in which they work. I thoroughly understand the value of certain features to the people of that area. Then, the appraiser looks up recent transactions in the area and finds properties which are 'comparable' to the property being appraised. Using knowledge of the value of certain items such as remodeled rooms, types of flooring, energy efficient items, patios and porches, or additional storage space, we adjust the comparable properties so that they more accurately match the features of Subject property.
 

• For example, if the comparable has a fireplace and the Subject doesn't, the appraiser may subtract the value of a fireplace from the sales price of the comparable.

• If the Subject has an extra half-bathroom and the comparable does not, the appraiser might add an amount to the comparable property.

After all differences have been accounted for, the appraiser reconciles the adjusted sales prices of all the comparable sales and then derives an opinion of what the Subject could sell for. This approach to value is typically given the most consideration when an appraisal is for a real estate purchase.

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Cost Approach

Here, I analyze information on local building costs, the cost of labor and other elements to ascertain how much it would cost to replace the property being appraised. This estimate often sets the upper limit on what a property would sell for. The cost approach is most applicable in valuing new or proposed construction. The cost approach is usually used to help support the final estimate of value not determine it.

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Valuation Using the Income Approach

A third method of valuing real estate is mostly developed for income producing properties and is sometimes used for single family properties when a neighborhood has a measurable number of renter occupied properties. In this situation, the amount of income the property produces is taken into consideration along with other rents in the area for comparable properties to derive the current value.

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Coming Up With the Final Value

Combining information from all approaches, the appraiser is then ready to put down an estimated market value for the Subject property. Note: While this amount is probably the strongest indication of what a house would sell for in an open market, it probably will not be the price at which the property closes. Depending on the specific circumstances of the buyer or seller, their level of urgency or a buyer's desire for that exact property, the closing price of a home can always be driven up or down. Regardless, the appraised value is typically employed as a guideline for lenders who don't want to loan a buyer more money than the property would likely sell for in an open marketplace.