Purchasing a home is the largest investment that will ever be made by most people. Regardless of whether the purchase is for a primary residence or for a vacation home, the highly complex nature of such a financial transaction is one that requires the input of multiple parties to complete the transaction.

As most people know, the realtor is the most frequently consulted party involved in the transaction by the buyers and sellers. The mortgage company is of course very deeply involved in the process as they provide the financial capital that is necessary to complete the transaction. Further, the title company is responsible for ensuring that the transaction has been completed from all necessary angles and that the title of the property smoothly passes from seller to buyer.

The real estate appraiser enters the picture by submitting an unbiased estimate of what a buyer might expect to pay, or what a seller receives, for the property where both the buyer and the seller are informed parties. To qualify as an informed party, most buyers and sellers consult a certified, licensed, professional appraiser to deliver an accurate estimate of the true market value of the property.

THE INSPECTION

The initial step involved in a real estate appraisal is the property inspection. It is the duty of the appraiser to physically inspect the property to confirm the true status of the particular party. The appraiser must physically see the features of the property, such as the bathrooms, number of bedrooms, the actual location, and so on, to confirm that these features truly exist and are in a condition that a reasonable purchaser would expect them to be. A sketch of the home is often made during the appraisal to confirm the actual square footage of the home and to convey the layout of the property. Arguably the most important role that the appraiser seeks to identify are any obvious features or defects that would alter the value of the house.

Following the physical inspection of the site, the appraiser will combine two or three approaches to determine the true value of the property. These methods include a comparison of sales, a cost approach and in the circumstance of a rental property, an income approach.

SALES COMPARISON

This method of determining the value of the property entails appraisers familiarizing themselves with the surrounding neighborhoods of the properties they are inspecting. Doing this allows them to understand the value of particular features to area residents. For example, appraisers make themselves aware of the area's traffic patterns, school zones and busy areas and use this knowledge to determine which particular surrounding features of he property will result in an alteration of its value. The appraiser also conducts research into other recent sales in the area and makes a note of which properties are comparable to the property he or she is appraising. Armed with this information, the appraiser begins the sales comparison.

Now that the appraiser is aware of the value of particular items, for example square footage, bathrooms, fireplaces, views, and so on, he or she adjusts the comparable properties in the area to set a more accurate value of the property being appraised. For example, if a comparable property has a view and hardwood floors while the property in question does not, the appraiser may reduce the value of the view and the hardwood floors from the sales price of the home. However, if the appraisal property has an extra bathroom and the comparable property does not, the appraiser may choose to increase the value of the appraisal property.

In the circumstance that the property produces income, for example a rental home, the appraiser may also choose to implement a third approach to determine the property's value. The appraiser may consider the amount of income the rental property produces to determine the current value of those revenues in the foreseeable future.

COST APPROACH

The cost approach is the simplest to understand. The appraiser collects information regarding building costs, labor rates and other factors in the area to help determine how much money would be required to construct a property very similar to the property being appraised. Once determined, this particular value is often used to set the upper limit on what the property in question is worth. This approach is necessary to illuminate to buyers that they should not pay more than this value if they are purchasing the home since they could construct a similar brand new home for less than what the one in question is worth. Usually factors such as the location and the home's amenities are not reflected in the cost approach.

RECONCILIATION   

The appraiser is then ready to combine results from all approaches and determine the estimated market value of what the property in question is worth. However, it should be noted that although this amount is likely the best indication of the true value of the property, the property may sell for a different price. Factors such as the seller's motivation and "bidding wars" may cause the final sales price to shift upwards or downwards. Furthermore, the value of the property determined by the appraisal is frequently referenced as a guideline for lenders who want to avoid lending more money to the buyers than the property is actually worth.

The most important thing to remember is that an appraiser will help you determine the most accurate value of the property so that you can make informed decisions in your real estate transaction.