What is an appraisal?
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

This is where the appraisal comes in. An appraisal is an unbiased estimate of what a
buyer might expect to pay - or a seller receive - for a parcel of real estate, where both
buyer and seller are informed parties. To be an informed party, most people turn to a
licensed, certified, professional appraiser to provide them with the most accurate estimate
of the true value of their property.

The Inspection
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's
duty is to inspect the property being appraised to ascertain the true status of that
property. The appraiser must actually see features, such as the number of bedrooms,
bathrooms, the location, and so on, to ensure that they really exist and are in the
condition a reasonable buyer would expect them to be. The inspection often includes a
sketch of the property, ensuring the proper square footage and conveying the layout of
the property. Most importantly, the appraiser looks for any obvious features - or defects -
that would affect the value of the house.

Once the site has been inspected, an appraiser uses two or three approaches to
determining the value of real property: a cost approach, a sales comparison and, in the
case of a rental property, an income approach.

Cost Approach
The cost approach is the easiest to understand. The appraiser uses information on local
building costs, labor rates and other factors to determine how much it would cost to
construct a property similar to the one being appraised. This value often sets the upper
limit on what a property would sell for. Why would you pay more for an existing property if
you could spend less and build a brand new home instead? While there may be mitigating
factors, such as location and amenities, these are usually not reflected in the cost

Sales Comparison
Instead, appraisers rely on the sales comparison approach to value these types of items.
Appraisers get to know the neighborhoods in which they work. They understand the value
of certain features to the residents of that area. They know the traffic patterns, the school
zones, the busy throughways; and they use this information to determine which attributes
of a property will make a difference in the value. Then, the appraiser researches recent
sales in the vicinity and finds properties which are ''comparable'' to the subject being
appraised. The sales prices of these properties are used as a basis to begin the sales
comparison approach.

Using knowledge of the value of certain items such as square footage, extra bathrooms,
hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the
comparable properties to more accurately portray the subject property. For example, if
the comparable property has a fireplace and the subject does not, the appraiser may
deduct the value of a fireplace from the sales price of the comparable home. If the subject
property has an extra half-bathroom and the comparable does not, the appraiser might
add a certain amount to the comparable property.

In the case of income producing properties - rental houses for example - the appraiser
may use a third approach to valuing the property. In this case, the amount of income the
property produces is used to arrive at the current value of those revenues over the
foreseeable future.

Combining information from all approaches, the appraiser is then ready to stipulate an
estimated market value for the subject property. It is important to note that while this
amount is probably the best indication of what a property is worth, it may not be the final
sales price. There are always mitigating factors such as seller motivation, urgency or
''bidding wars'' that may adjust the final price up or down. But the appraised value is often
used as a guideline for lenders who don't want to loan a buyer more money that the
property is actually worth. The bottom line is: an appraiser will help you get the most
accurate property value, so you can make the most informed real estate decisions.
Whittington Appraisals
View Kevin O'Mellan's profile on LinkedIn