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General Appraisal Information
A real estate appraisal is a property valuation or land valuation practice of developing an an unbiased estimate opinion of the value of real property, usually its Market Value. The need for appraisals arises from the heterogenous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location and condition - which is the most important determinant of their value.
A real estate appraisal is performed by a licensed or certified appraiser. It is also known as a property valuer or land valuer. If the appraiser's opinion is based on Market Value, then it must also be based on the Highest and Best Use of the real property. For mortgage valuations of improved residential property, the appraisal is most often reported on a standardized form, such as the Uniform Residential Appraisal Report.
The appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
Cost Approach
The cost approach was formerly called the summation approach. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. The value of the improvements is often referred to by the abbreviation RCNLD (reproduction cost new less depreciation or replacement cost new less deprecation). Reproduction refers to reproducing an exact replica. Replacement cost refers to the cost of building a house or other improvement which has the same utility, but using modern design, workmanship and materials. In practice, appraisers use replacement cost and then deduct a factor for any functional disutility associated with the age of the subject property.
In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches.
Sales Comparison
The sales comparison approach examines the price or price per unit area of similar properties being sold in the marketplace. Simply put, the sales of properties similar to the subject are analyzed and the sale prices adjusted to account for differences in the comparables to the subject to determine the value of the subject. This approach is generally considered the most reliable if adequate comparable sales exist. In any event, it is the only independent check on the reasonability of an appraisal opinion.
Using knowledge of the value of certain items such as square footage, bathroom count, floors type, view, condition (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property.
Reconciliation
The real estate appraiser applies the Reconciliation to consider the appropriateness of each approach to the subject, the quality of available data, and the amount of judgmental Adjustment required to reach each estimate.
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