Although appraisals are not an established science, there are specific processes that followed to ensure uniformity. There are proven techniques used simultaneously with information that make it easy for appraisers to do their job. Professional appraisers interpret data in an unbiased ay according to the information they get, to give clients factual and real information (Richard Kanes & Associates, 2018). They do this through their experience in the field and the knowledge and skills that they have acquired. Since appraisers may be taken to court and may be needed to explain why they appraised a product or real estate item, they caution when appraisals and research to make sure they appraise correctly (Appraisal Institute, 2017). It should be noted that real estate agents, salespersons, and brokers do not need to be trained as professional appraisers. However, they are expected to be familiar with the approaches by which appraisals are done. They should know the market value that the property has been listed amounts to.
An appraisal is an approximate value of a product or property. Appraisers measure the value of a piece of property and then offer their opinion about the worth of the piece. They also have supporting statements that enable the buyer to make sense of the price set or the value accorded. The appraisal process is done in a series of steps, which include defining the problem, where the appraiser identifies the real estate piece according to the legal documentation and the street it is located, and the aim of the appraisal (Appraisal Institute, 2017). Second, there is a collection of data which includes economic, property and neighborhood data; then applying and analyzing the three approaches which are cost, income and sales comparison, the fourth process is looking for connections in the data and analyzing results while the fifth process is writing the appraisal report. These processes will be discussed in-depth in this paper.
Because value has different meanings to different people, the assessment's aim is the appraiser's first issue. The value will be known as business interest, acquisition interest, or in-use value to the homeowner. Given the insured interest, the insurance company must consider while the creditor is concerned about the debt value. A report from the appraiser will explicitly indicate the essence of the assessment. Valuation is the present value of future benefits that precede real-estate possession (Guo, 2014). Therefore, for the value to be measured, there must be foreseen benefits. Valuation is customarily done to evaluate the market value, which is the value or price at which the buyer would be willing to buy the property. The seller would most probably sell the property. However, the market value is different from the market value as it is susceptible to change since it is the price for which the people negotiate (Richard Kanes & Associates, 2018). The price may change if the seller is in a hurry to sell so that they can move to another place or when they are in debt. However, it should be noted that the market value is not subject to change, and the price is usually set to reflect a property's value.
Moreover, the price value can be set to define the loan value, where the estimated value of the property can be submitted to a bank and can serve as collateral for a loan. It can determine the insurance value required by the lender when a borrower with property takes a loan to insure the property for the lender's interests to be protected (Ventolo, n.d.). The purpose of an appraisal may also be to set the insurance value, the lease interest, and the tax assessment. Besides, there are factors that the appraiser must consider, which affect the valuation of his or her property, which may be regulatory or political, economic or financial, physical, or environmental and sociological factors.
Political factors affect inflation, which in turn influences the cost of housing. Interest rates are highly proportional to policy intervention, thereby deciding the number of individuals who may afford real estate. Mortgage investments are often influenced by the political circumstances of national and local authorities. Taxes on land and utilities imposed by the municipal government authority influence property prices. When rates are excessively high, and there are no appropriate infrastructure requirements such as street maintenance and police safety, residents may not choose to move to an area or live there (Ventolo, n.d.). Economic factors are also important. When the economy is good, the property price is likely to rise because people can afford them, while the house prices decline when there is poor economic development.
Moreover, physical factors greatly influence the prices because of the land's topography and geography, which may increase or reduce property costs. Some areas are priced more than others because of their proximity to major cities or natural scenery that may attract some people to such places (Ventolo, n.d.). Sociological factors include the values that are attached to a property through people’s perceptions and attitudes. Other factors that may affect value include the highest and best use of property, the utility value, scarcity, and the principle of demand and supply.
The next step involves collecting data and analyzing the data found. The assessor preserves an information system readily as a resource. The database gathers and preserves general information about the area, community, and neighborhood. Regional and town report provides an understanding of the region's market situation. The details about the neighborhood provide knowledge about areas beyond those street limits where the properties are of reasonable price range and age (Thompson South-Western, n.d.). Some considerations regarded are the annual salary and ages of the inhabitants, and accessibility for stores, public transit, places of worship, and schools. Before analysis, the site of the property is evaluated where the lot size and the footage of the house, as well as other properties, are assessed. An individual assessment is performed to record any unique properties that may be in the house or property.
The third process is an analysis that involves three approaches to assessing the value. The sales comparison approach compares property being sold to other properties in the neighborhood that have been sold and thereby make the necessary adjustments. The assessor must search at similar recently sold assets. Assets actually on the sales market are not listed because there is no deal between buyer and seller (Guo, 2014). Three items on the minimum allow the assessor the freedom required to shape a judgment on the valuation of the relevant land. The more the properties are identical, the simpler the interest to infer. Allowances and adaptations are made for any property differences (Thompson South-Western, n.d.). The comparative value approach to pricing is the most widely used tool for determining residential property because it relies on what comparable properties are currently selling for. Some of the adjustments that property agents make are such as the time in the market, the age and location of the properties, the lot size and the quality of construction, and the general condition of the property. The number of bedrooms and the state of the living area, as well as baths and basements, are important considerations during the appraisals.
The cost approach method is usually used when there are no suitable similar or comparable properties. The methods that can be used in this method are such as the square foot method, which considers the cost of a just-concluded construction that is similar to the one being appraised. It is divided by the square footage of the building, which then establishes the estimated cost. Alternatively, the cubic-foot method can be used where the approach considers the volume of the building (Guo, 2014). This method is typically used for warehouses and industrial buildings as opposed to houses. The method of income is determined by the perceived profit generated compared to the property 's valuation (Thompson South-Western, n.d.). The damage incurred by obsolete community planning factors impact valuation assessor decides what the estimated potential profit will be, and transforms it to the current value of the land. The application of the revenue approach is useful for the person who wishes to buy an investment property. Because risk is involved, the borrower may expect a better return than will be offered by a money fund or savings account. The method to profit assumes value as the property being measured is older, and the method to costs is less persuasive due to the account of the depreciation.
The correlation of value is done by correlating the above approaches. Every one of the above valuation methods can be used to assess the target property assessment, but they do not always return the same interest. This might mean that a product redesign would cost much less than the current market value if competition were unusually high. In income-producing property, the most valid is typically given to the capitalization method (Thompson South-Western, n.d.). The revenue method is usually not used where the target is a single-family home. If the home is relatively recent, the use of the cost approach is of value. The market value would get nearest to the real value of the property. If the calculation is to be carried out on an estate for which current reference sales cannot be recorded, such as a pickle plant, a library house, or a school, so the expense method is likely to bear the most significant weight.
The assessor shall calculate the ratio of the most appropriate method when reconciling the difference between the three separate strategies. The written documentation is the last stage in the assessment process. The aim of the assessment will decide the duration and scope of the formal analysis (Thompson South-Western, n.d.). The appraisal report should consist of the minimum requirements which include the identification of a property, the date that the appraisal was made, the aim of the appraisal, the data that was used to come up with a conclusion, and the certification of the appraiser (Thompson South-Western, n.d.). It is delivered verbally by the appraiser t the person in need of the report and delivered in letter form as a formal document.
References:
Appraisal Institute. (2017). Identifying Rights and Interests to be Appraised in Rural Property. https://drive.google.com/file/d/1Q1noETxOGqQjgeFFozV04p0IrW3iCklW/view
Guo, J., Xu, S. & Bi, Z. An integrated cost-based approach for real estate appraisals. Inf Technol
Manag 15, 131–139 (2014). https://doi.org/10.1007/s10799-012-0152-7
Richard Kanes & Associates. (2018, January 18). Appraisal process | Real estate appraisal | Richard Kane & Associates. Kane Appraisers | Residential Real Estate Appraisers | Western MA. https://kaneappraisers.com/appraisal-process/appraisal-process/
Thompson South-Western. (n.d.). The Appraisal Process. https://www.swlearning.com/pdfs/chapter/0324187475_16.PDF
Ventolo, W. L., & Williams, M. R. (n.d.). fundamentals of Real Estate Appraisal. https://drive.google.com/file/d/1b5AEhAf4JbW-7QC0sDZ9XsxuHxxxs-Fn/view
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