An
appraisal
of real
estate
is the
valuation
of the
rights
of
ownership.
The
appraiser
does not
create
value,
the
appraiser
interprets
the
market
to
arrive
at a
value
estimate.
As the
appraiser
compiles
data
pertinent
to a
report,
consideration
must be
given to
the site
and
amenities
as well
as the
physical
condition
of the
property.
Considerable
research
and
collection
of
general
and
specific
data
must be
accomplished
before
the
appraiser
can
arrive
at a
final
opinion
of
value.
Due
to the
many
types of
value,
such as
Fair
Market
Value,
Insurance
Value,
Tax
Value
and
Value In
Use, the
need to
precisely
define
the
purpose
of the
appraisal
is
essential.
An
appraisal
is an
opinion
of value
or the
act or
process
of
estimating
value.
This
opinion
or
estimate
is
derived
by using
three
common
approaches,
all
derived
from the
market.
They
are:
- Cost
Approach
to
value
is
what
it
would
cost
to
replace
or
reproduce
the
improvements
as
of
the
date
of
the
appraisal,
less
the
Physical
Deterioration,
the
Functional
Obsolescence
and
the
Economic
Obsolescence.
The
remainder
is
added
to
the
Land
Value.
- Comparison
Approach
to
value
makes
use
of
other
"bench
mark"
properties
of
similar
size,
quality
and
location
that
have
been
recently
sold.
A
comparison
is
made
to
the
subject
property.
- Income
Approach
to
value
is
of
primary
importance
in
ascertaining
the
value
of
income
producing
properties
and
has
little
weight
in
residential
type
properties.
This
approach
provides
an
objective
estimate
of
what
a
prudent
investor
would
pay
based
upon
the
net
income
the
property
produces.
Reasons
For An
Appraisal
There
are many
reasons
to
obtain
an
appraisal.
The most
common
reason
is for
Real
Estate
and
Mortgage
Transactions,
but we
have
compiled
a list
of other
reasons
you may
need to
order an
appraisal:
- to
obtain
a
loan.
- to
lower
your
tax
burden.
- to
establish
the
replacement
cost
of
insurance.
- to
contest
high
property
taxes.
- to
settle
an
estate.
- to
help
you
make
one
of
the
largest
financial
decisions
in
your
life.
- to
provide
a
negotiating
tool
when
purchasing
real
estate.
- to
determine
a
reasonable
price
when
selling
real
estate.
- to
protect
your
rights
in a
condemnation
case.
- to
allow
you
to
obtain
a
qualified
appraisal
report.
- because
a
government
agency
such
as
the
IRS
requires
it.
- you
are
involved
in a
lawsuit.
Home's
Market
Value
In
the real
world,
very few
individuals
order
appraisal
reports
to
establish
an
offering
price or
to
substantiate
a
purchase
price.
At the
point
that an
offer to
purchase
(in a
typical
residential
transaction)
is made,
the
price
has been
set by
other
parties,
not the
purchaser.
The
price
has been
determined
by the
seller,
who
wishes
to
obtain
the
highest
price
possible,
or the
agent,
who
receives
a
percentage
of the
price as
compensation
and
often
represents
the
seller
in the
transaction.
The
real
estate
agent
will
typically
perform
a
comparative
market
analysis
(CMA).
The
appraisal
laws in
most provinces
allow
real
estate
agents
to
perform
CMAs
without
an
appraiser's
license
or
certification.
A CMA is
a
necessary
part of
the
agent's
preparation
for a
listing
and
consists
of
examining
sales of
properties
in the
area to
arrive
at a
listing
price.
The
reliability
of the
CMA
depends
upon the
agent's
experience
and the
characteristics
of the
property.
The
agent
will
suggest
a
selling
price to
the
seller
based
upon the
analysis.
However,
neither
the
seller
nor the
agent
are
bound by
the
results
of the
analysis,
and the
agent is
not
required
to
follow
any
formal
procedure
in
completing
the CMA.
If a
seller
wishes
to list
the
property
at a
price
higher
than the
price
suggested
by the
agent,
then the
agent
may be
forced
to
accept
the
listing
at that
price or
risk
losing a
commission.
The
seller
of a
property
may want
to order
an
appraisal
before
listing
the
property.
Of
course,
the cost
of the
appraisal
is
always a
deterrent,
especially
if the
seller
knows
that a
buyer
will pay
for it
when
applying
for a
loan.
But the
appraisal
is often
justified.
The
seller
could
lose a
sale if
the
property
appraised
for less
than the
sale
price
when
appraised
by the
appraiser.
Appraisal
Needed
To
Obtain
The
majority
of real
estate
appraisals
are
requested
by
mortgage
companies
to
validate
the
property's
purchase
price
for loan
purposes.
Except
for
periods
of very
low
interest
rates
when
everyone
is
refinancing,
most
loans
are for
the
purchase
of real
estate
and
ordered
after a
sale
price is
negotiated.
Purchasers
mistakenly
assume
that
mortgage
companies
are
looking
after
their
interests
in the
purchase
transaction.
The
law
states
that if
the
mortgage
company
orders
the
appraisal,
the
appraiser
is
responsible
only to
the
mortgage
company.
We
expect
mortgage
companies
to be
prudent
and they
should
be, but
being
prudent
is
protecting
their
interest,
not
necessarily
the
purchaser's.
The
mortgage
company's
position:
- It
has
two
sources
of
repayment:
the
purchaser's
income
and
the
property.
- The
responsibility
to
repay
the
loan
is
not
based
upon
the
property's
value,
so
the
purchaser
is
obligated
to
pay
the
note
even
if
the
property
value
declines
to
zero.
- The
loan
may
be
insured
or
guaranteed
by a
government
agency.
- The
government
does
not
promise
to
pay
the
purchaser's
debt
if
the
property
value
is
wrong.
- There
is
no
decrease
in
risk
for
the
purchaser
regardless
of
the
loan-to-value
ratio.
The
investment
by
the
purchaser
is
the
same,
a
mixture
of
personal
cash
and
a
loan
that
must
be
repaid.
