What is an appraisal?
Professional real estate appraisers consult and participate in various decisions about real estate.
Market value estimates are the most frequent type of appraisal assignment. However, appraisers are called upon to provide a wide range of additional appraisal services–from consultation to various forms of decision making because of their specialized training and experience.
An appraisal is based on selective research into appropriate market areas:
- the assemblage of pertinent data,
- the application of appropriate analytical techniques, and
- the knowledge, experience, and professional judgment necessary to
- develop an appropriate solution to a problem.
(noun) The act or process of developing an opinion of value; an opinion of value.
(adj.) Of or pertaining to appraising and related functions such as appraisal practice or appraisal services.
Source: USPAP 2010
The Purpose of an Appraisal
An appraisal provides an opinion, usually an estimate of value, to be used in making real estate decisions. The value most commonly sought is market value. However, other concepts of value may be appropriate, depending on the client’s needs.
Reasons for an appraisal include:
Transfer of ownership:
- To help prospective buyers decide on offering prices.
- To help prospective sellers determine acceptable selling prices.
- To establish a basis for exchange of real property.
- To establish a basis for reorganization for merging the ownership of multiple properties.
- To determine the terms of a sale price for a proposed transaction.
Financing and credit:
- To estimate the value of security offered for a proposed mortgage loan.
- To provide an investor with a sound basis for the purchase of real estate mortgages, bonds, or other types of securities.
- To establish a basis for a decision regarding the insuring or underwriting of a loan on real property.
Just compensation in condemnation proceedings:
- To estimate the market value of a property as a whole-before the taking.
- To estimate the market value of the remainder after the taking.
- To estimate damages to a condemned property.
- To estimate assessed value.
- To separate depreciable (or capital recapture) assets such as buildings from non-depreciable assets such as land, and to estimate applicable depreciation (or capital recapture) rates.
- To determine gift or inheritance taxes.
- To estimate the value of preservation easements.
Appraisals may also be requested:
- To set rent schedules and lease provisions.
- To determine the feasibility of a construction or renovation program.
- To help corporations or third-party companies purchase the homes of transferred employees.
- To serve the needs of the insured, insurer, and adjuster.
- To aid in corporate mergers, issuance of stock, or revision of book value.
- To estimate liquidation value for forced sale or auction proceedings.
- To counsel a client on investment matters, including goals, alternatives, resources, constraints, and timing.
- To advise zoning boards, courts, and planners, among others, regarding the probable effects or proposed actions.
- To arbitrate between adversaries.
- To determine supply and demand trends in a market.
- To determine the status of real estate markets
Types of Appraisals
The Uniform Standards of Professional Appraisal Practice (USPAP), which are the state license law requirements for appraisers, governs the types of reports which appraisers can complete. The two types of appraisal reports are explained below:
This is a narrative or form report developed with content consistent with the intended use of the appraisal. This report at a minimum summarizes the information analyzed, valuation methods and techniques employed and reasoning that supports the opinions and conclusions of the appraiser(s).
Restricted Appraisal Report
This is an abbreviated report. The report is usually a brief letter with no supporting data included. Opinions and conclusions stated in the report must be supported by data and analysis in the appraiser’s work file.
The Valuation Process
Although characteristics of properties differ widely, most appraisal problems can be solved through a systematic valuation process. In the valuation process:
- The problem is defined,
- The work necessary to solve the problem is planned,
- The data involved are acquired, classified, analyzed, interpreted, and converted into an appropriate estimate of value.
- The valuation process is employed to provide the answer to a client’s question about real property value. This process leads an appraiser from fully identifying the particular problem to reporting its solution to the client.
Each real property is unique, and many different types of value can be estimated for any single property. The most typical appraisal assignment is undertaken to estimate market value, and the valuation process contains all the steps needed in that type of assignment. However, the valuation process also provides the framework within which any other defined value can be estimated. Further, conclusions in consulting assignments often necessitate the derivation of value estimates through the application of the valuation process.
The valuation process is accomplished by following specific steps, the number of which depends on the nature of the appraisal assignment and the data available to complete it. In all cases, however, the valuation process indicates the pattern to be followed in performing market research and analysis of data, in applying appraisal techniques, and in integrating the results of these analytic activities into an estimate of defined value.