The Appraisal Process

The Appraisal Process

The two main parts of the appraisal process include data gathering and report writing.  In most cases, data for the subject of the appraisal will be gathered by a personal observation of the exterior and the interior of the home.  While a full interior and exterior observation of the property is the most typical, this is not necessarily required as long as the Scope of Work is clearly outlined within the appraisal.  

During a real estate appraisal observation, the appraiser will visit the property and conduct a thorough evaluation of the property. The appraiser will typically start by looking at the exterior of the property which includes an observation of the site, home and/or any other real estate associated with that land. They will then move on to the interior of the property, observing the rooms, features, and finishes. The appraiser will also consider any improvements or updates that have been made to the property, as well as any deferred maintenance issues or other problems that arise during the observation that may affect the value of the property. 

In addition to the physical inspection of the property, the appraiser will consider other factors that can affect the value of the property. Some of these influences can include the location of the property, the size and layout of the property and the most similar comparable sales. The appraiser may also review documents such as the property's deed and any inspections or appraisals that were recently completed as long as they can be obtained through the normal course of business.

Finally, this data is analyzed and compiled into a report that allows the intended user to fully understand how the final opinion of value was determined.

Approaches to Value

When determining a value opinion for a property, the appraiser will consider all of the following approaches to value but may only apply one within the report. These approaches are as follows:. 

1. Sales Comparison Approach (SCA)

The most common approach to value used in single family residential real estate is the Sales Comparison Analysis(SCA). This approach is required by GSEs (Government Sponsored Enterprises) like Fannie Mae and Freddie Mac; therefore, it is mandated that all appraisal reports completed for lending purposes, where the mortgage may be sold to secondary market participants, must rely on the SCA.  The SCA is based on the use of comparable sales to determine a range of value or a specific dollar amount based on what other competing properties have sold for within a given time period.  

2. The Cost Approach

The cost approach is a method used in real estate appraisal to estimate the value of a property by determining the cost of reproducing or replacing the property. The purpose of the cost approach is to provide an estimate of the property's value based on the principle of substitution, which states that a buyer will pay no more for a property than the cost of acquiring a similar property. This approach can be particularly useful when valuing unique or specialized properties that have few comparable sales in the market. It is also helpful when appraising new construction or recently renovated properties.

To use the cost approach, the appraiser estimates the current cost of construction or replacement of the improvements on the property, deducts any depreciation of those improvements, and adds the estimated land value. The appraiser then adjusts this value to account for factors such as physical deterioration, functional obsolescence, and economic obsolescence.  

3. The Income Approach

  The income approach is a method used in real estate appraisal to estimate the value of an income-producing property, such as rental apartments or commercial buildings. The purpose of the income approach is to determine the present value of the property's future income streams.  The income approach is useful for valuing income-producing properties because it focuses on the expected return on investment for the property. It is commonly used for commercial appraisals, it is often developed in residential real estate when the income a property can produce is a strong factor and selling point for potential buyers of the property.