An appraisal is an estimation of the value of a specific piece of real estate based on the judgment of a licensed professional trained to correctly estimate such values. Using specific criteria accepted in the field of appraisal, the appraisal will estimate the value of the house and then write a report explaining their reasoning and the method used to achieve this amount. The dollar amount given by the appraiser is meant to be a guide to someone attempting to make a decision about the property.

There are several reasons why an appraisal might be needed. A few of these would be:

For the purpose of listing of the property for sale
For the purpose of acquiring hazard insurance
To determine a valuation for tax-write-off purposes
To make final settlement of an estate at the death of the owner
For the purpose of refinancing
Or the appraisal could be ordered by a prospective purchaser to determine what a reasonable offer might be.

The report, although it will be unique in format and style, will have the basic elements required of an appraisal, which we will list here.

The report will begin with an introduction, intended to convey the intentions of the analysis and to state the amount that the house was appraised for, and the date on which it was appraised.

There will be an analysis of the local market, specifically focusing on the geographic area surrounding the property in question, and the legal description of the property will be given. To accompany this, there may be pictures of the house, descriptions of the neighborhood and details about taxes. The current zoning information will be included in this section, along with any pertinent history of the house will be stated, including fires, floods, remodels, etc.

There will also be a section discussing the highest and best use of the property, which is mainly indication what the property could be worth if it were being used in a different capacity than it is now. For instance, if a house and lot that it is on was built when the neighborhood was exactly that, a neighborhood, but now most of the street has become zoned commercial and the house is now surrounded by businesses and located on a now very busy street, the real estate may be worth more with a view to converting it to commercial property. Most of the time, this section will not affect the appraisals, as most residential real estate sold is not bought for the purpose of rezoning and establishing a business.

For the real meat of the report, however, are techniques used to assign a value to the property. Appraisers will use three different methods to attain this end: market comparison, cost reproduction and income capitalization.

The market comparison rests on the study of comparables, which are the prices of recent sales of houses in the same neighborhood that are similar in structure, size and amenities. For this to work, the list of comparables have to qualify certain criteria.

The term “adjustment” is used in conjunction with the term “comparables”. Comparables establish the base appraisal value of a subject property by comparing like property in a related area to like property. However, there are always dissimilarities and differences between these parcels of real estate. These positive and negative differences must be adjusted up or down so as to arrive at this comparable value for the subject property. Such adjustments are in either dollar values or perhaps percentage amounts.

1. The sale has to have been transacted very recently. If the sale is too old, there is a possibility that the market has changed and that if the house would now be sold again, it would sell for higher or lower, depending on the market variables that have changed.

2. The location has to be similar enough to warrant the comparison. Location, as we all know, is one of the most important aspects of real estate and a house worth $100k here might be worth $125k a few blocks over.

3. The price of a house can be misleading when considered from the viewpoint of financing considerations. People who might have no money for a down payment might be able to tack the closing costs onto their loan, this making the cost of the house seem more than what it is. There are other considerations of the same persuasion that have to be taken into account.

4. There has to be enough comparables to justify the use of the study. Too few comparisons may mean a faulty calculation due to the other factors that might lead to a mistaken appraisal price.

The second approach is to evaluate what it would cost to replace the property. To do this, the depreciation of the property is noted and subtracted from the replacement cost. The replacement cost comes from analyzing what it would take to build a structure similar in amenities, but not necessarily an exact replica of the structure that stands there now.

The last method is the Income method. This approach takes in to account what the property is worth in terms of how much income it is able to produce. With real estate intended for investment purposes, this method is straightforward enough. The projected rate of rent is figured against the cost of the house and an assessment of cash flow is extracted. For real estate that is intended for a rental property, a study is done on comparables that are providing a rent and the figures are taken from there. The report should include a projection of the length of time the property is expected to keep producing this income and a list of things that might potentially change the value of the property.

Finally, there will be the reconciliation that will state the appraiser’s reason’s for setting the value at the rate he has, or a giving a range of value.