The 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.

The Sales Comparison Approach to value makes use of other benchmark or "comparable" properties of similar size, quality and location that have recently sold. A comparison is made to the subject property and adjustments are made to account for dissimilarities.

The Income Approach to value is of primary importance in ascertaining the value of income producing properties, and is generally given little weight in single-family residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net or gross income the property produces.

Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated. For additional information click here: The Real Estate Appraisal Process

Standards

Under Title XI of the Financial Institution Reform, Recovery and Enforcement Act, the AQB establishes the minimum education, experience and examination requirements for state certified real property appraisers. The Appraiser Qualifications Board (AQB) is composed of five appraisers who are appointed for three-year terms by the Board of Trustees of The Appraisal Foundation. States are required to implement appraiser certification requirements that are no less stringent than those issued by the AQB in this Criteria. To further clarify the intent of the Criteria, the AQB periodically issues Interpretations of the Criteria.

Why an Appraisal?

There are many reasons why you need a real estate appraisal. Reduce property taxes, probate, estate planning, and divorce settlements are some. The most common one is to obtain a mortgage.

Appraise Before You Make An Offer?

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.

Usually, individuals applying for a loan are only interested in obtaining the loan and unfortunately are not worried about the prudence of buying the property at the agreed price. In fact, some purchasers will try to encourage appraisers to increase the appraised value so that they can purchase the home regardless of its value.

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.

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 states 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 Home Buyer Checklist can help you record information about each house you preview to help arrive at a better buying decision.

Should YOU Skimp on the Appraisal?

You could be throwing caution to the wind. In a changing appraisal marketplace, financial institutions may be tempted to skimp on appraisal services. Loosened regulations may tempt them to throw caution to the wind, which could have dangerous consequences for YOU.

Today, many lenders are using Automated Valuation Model (AVM) tools to replace the traditional appraisal. It's important for borrowers to know that an AVM analysis, by itself, is not an appraisal. The results of an AVM are intended only to help the lender assess their risk associated with the loan.

More than ever, it's essential to for buyers and sellers to ASK for an appraisal, especially if your closing fees include the charge for one. Make sure you're getting what you pay for!