When buying or selling real estate, an appraisal of property is performed for the protection of all who are parties to the transaction.
Although a written appraisal that is performed by an independent contractor, called an appraiser, is not necessarily required by law, they are highly recommended for the protection and peace of mind of all the parties involved. This includes the buyer, the seller, and if financing is involved, the lending agency.
Sellers usually have an idea of what their property is worth. They know what property is selling for in the area by comparing other properties that have recently sold to their own. This is often done by realtors who have access to comparable property information that is provided by title companies. Realtors can also gather information from the multiple listing services in the area and from other realtors.
Buyers, on the other hand, may have the same information available to them but may want to get the price verified by an independent source, usually by a licensed appraiser. In most cases, the buyer pays for the appraisal.
If financing is required, most lenders will most certainly require a written appraisal before underwriting a loan for a buyer. In most cases, if the appraisal comes in lower than the selling price, the lender will only underwrite the loan for the appraised value. This may cause a problem between the seller and the buyer if the seller refuses to lower his price to that of the appraisal. A lower appraisal may cause the sale to fall apart. In certain cases, a lender will allow the deal to go through if the buyer agrees to pay the difference between the appraised value and the sellers asking price.
Although an appraisal is an opinion of value based on the location of the property being appraised, the property's condition and replacement costs for improvements, the condition of properties in the surrounding neighborhood and the condition of the neighborhood itself
The size of the property, including the square footage of the lot, the number of buildings on the lot, the square footage of each individual unit, and the number of bedrooms and bathrooms, is a significant factor in determining value.
Market value is the price that a property generates in a fair and open market without undue influence.
Usually, three methods of evaluation are used to determine a factual estimation of fair market value and they are reported on a Universal Property Appraisal Report.
THE COST APPROACH
The cost approach is the estimated price of replacing a structure, minus the estimated accrued depreciation and then adding the market value of the land. The remaining economic life of the property is also taken into consideration.
THE INCOME APPROACH
The income approach is generally used when the value is ascertained by dividing the annual net operating income of a property by an overall capitalization rate that is usually acceptable for similar properties in the same area.
THE MARKET VALUE APPROACH
The market value approach determines value by comparing the subject property to properties in the neighborhood that are similar in size and character and have sold recently. The terms of sale and other circumstances are also considered.
If there are adverse conditions such as non-conforming structures, environmental hazards, functional obsolescence, or if there are no similar listings in the neighborhood, an appraiser will normally make adjustments accordingly.
An appraiser cannot place a pre-determined value on a property or a value that unduly benefit the client. He must personally inspect the property being appraised and report any adverse conditions in his report.
The conclusions of an appraisal report must be presented in a professional and unbiased manner.
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