Real estate appraisal

A real estate appraisal is an opinion or an estimate of value of real estate (property or land), using standard methods by an appraiser. In real estate appraisal, every property appraised is unique and varies depending on its condition. People who want to buy, sell or lend something use these appraisals. A seller of a property would make sure that his selling price is not lower than the property’s actual worth and a buyer would also make sure that the property he intends on purchasing is actually worth the price it’s being offered for. An appraiser is required to have a license and also has the chance to attain three levels of appraisal certification, which include: Appraisal Trainee, Licensed Appraiser and Certified Appraiser. The appraisers are also referred to as “land or property valuers”. For an appraisers opinion to be of the highest and best value then that opinion must be based on market value.

Appraisal Report

An appraisal report is an accurate manifest of the appraisal, which has been made for someone who intends to lend a property or by the owner of the property who intends on reaching a selling price. Many appraisal reports are established based on forms such as the Uniform Residential Appraisal Report, which adheres to the Uniform Standard of Professional Appraisal Practice (USPAP).

The appraisal report establishes the following

  • The date of the report
  • Identification of the real estate being valued
  • The reports intended purpose
  • The best use of the property or land
  • The estimated value of the real estate
  • Conditions, which may affect the property or land value.
  • Comply with USPAP standards

Appraisal Process

This process assesses any data that might influence the value of a property. This data is usually classified as general data; this may include region, city, and location if the property, and specific data which is direct information from the appraised property. Another factor that is considered during appraisal is the absorption rate, which determines how long it would take to sell a property.

Types of Value

Some of the most common types of value used in a real estate appraisal are;

  • Market Value: This is assumed to be the most possible amount for which a property will sell for in the open market. It is also considered as the cash price and does not take any financial arrangements into consideration.
  • Investment Value: This is the value of the asset to the prospective owner or to a particular investor and could be higher or less than the original market value of the same property
  • Value in use: This is the specific value to one particular client; it could be below or above the market value. It is a single opinion value.
  • Insurable Value: This is the real property value that does not include a site value but is covered by an insurance policy.
  • Liquidation Value: This is a value that is commonly sought after in bankruptcy proceedings. It is usually considered as orderly or forced liquidation.

Definition of Market Value in the United States

Despite the fact the most used form of value is the Market Value. The USPAP doesn’t define market value but rather give guidance on how it should be used.

It says that it is a type of value that supposes the transfer of a property, under a specific date and under specific conditions as set by the appraiser.

Determining Market Value

The major methods for determining market value are

  1. Cost Approach
  2. Sales Comparison
  3. Income Approach

The cost approach and the sales comparison method follow the economic principle of substitution, making it so that the value of a property can be comparable to another of a similar quality. Not all 3 methods can be used to determine a property’s market value. There is usually a best method but this would narrow down the estimated market value.

Valuation Methods Used in The UK

Valuation methods in the United Kingdom has been classified into five methods

  1. Cost Method: This method is mostly used for real estate of special character or for land that has been obtained through heritage since there is no market for it.
  2. Comparative Method: This method is mostly used on properties that have a good sheet of previous sales.
  3. Residual Method: This method is used for properties that are ready and prime for development or for empty plots of land.
  4. Profit Method: This method is used for properties where the rate is slightly higher than other properties, such as hotels and restaurants
  5. Investment Method: This method is used mostly for residential properties that will bring about a continuous stream of income through letting. This method is also just a comparison method, as a simple model would obtain the value of the property.

Related Questions

Published on 16th June 2017

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