June 15, 2018.
Also known as property valuation or land valuation, a real estate appraisal is the process for defining the value of a particular piece of property. This valuation provides a relative idea of the fair market value of the real estate property being assessed.
What goes into a real estate appraisal? Hint: It’s important
The appraisal is a produced document that officially represents an educated, calculated opinion of a property’s value. It also provides essential real estate information and describes what factors contribute to the value and how it compares to other real estate properties in the area. This is based on observable facts, not just a random guess.
Factors used for real estate appraisal include:
- Location, location, location
- Local amenities
- School system
- Crime rate
- Square footage
- # of bedrooms and bathrooms
- Heating and air conditioning
- Construction of the property
- Materials used
- Storage and garage space
- Sales comparables
- Current market environment
- Buyer’s market vs. seller’s market
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Who performs your home appraisal? Leave it to the pros
Real estate appraisers, who are licensed professionals, are more often than not contracted by mortgage lenders to perform the appraisal. Their job is much like an assessor, but instead of measuring the value of multiple properties simultaneously, a real estate appraiser assesses one property at a time.
This vocation is only becoming more important in a growing and rapidly changing market.
5 reasons your appraisal (really) matters when buying or selling a house
We’re going to break down the five reasons why appraisals are an imperative part of real estate:
1. Price vs. value.
For starters, getting a real estate appraisal is crucial, because it serves as a barometer to protect both the buyer and the seller of the real estate property.
Price (or cost) versus value is different, as how much someone is willing to pay for real estate doesn’t necessarily coincide with the property’s intrinsic value. Fair market value is relative and constantly changing based on many factors, such as: recent sales comparables, location, condition of the home, square footage, recent renovations/ improvements, noise pollution, etc.
Taking into consideration all or as many factors as possible is essential in this process. On one hand, a seller doesn’t want to sell a home at too much of a bargain, and on the other hand, a buyer doesn’t want to get swindled by paying too much for property.
2. Unbiased expertise.
In any real estate transaction, there are generally three parties involved: seller, buyer, and lender. Real estate appraisals make sure that all parties’ interests are taken into consideration.
An appraiser is usually hired by the lender to ensure that the proposed price of the property is an accurate representation of the value. The lender protects its interests before approving the seller’s loan to buy the home by looking at all of the possible factors that influence the value of a particular piece of real estate. For example, sales comparables in the neighborhood and recent developments in the market have an immediate effect on a property’s value.
This process not only protects the lender and its assets but also the buyer by not tying their hands up in an overvalued mortgage or unfavorable financial situation in the long-term. Additionally, the seller will have a more accurate price point for how much they can sell their home. Of course, there are always those who knowingly try to squeeze every possible penny out of a deal, but in general, a real estate appraiser is essentially a referee between the parties looking to play out the transaction.
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3. Financial protection.
The role of an appraiser is increasingly important because the real estate market is more speculative now than it was only a generation or two ago.
The era of buying a home as a family and living in that home for generations is not as prevalent as it once was. This trend generated stability, as a home’s value would increase steadily over time. Unfortunately, the real estate market is much more volatile now because there are many more people looking to buy and flip homes quickly. While this generates potential financial opportunities, it also makes the real estate market much more unpredictable.
Real estate appraisals are more important than ever since the value of a home can fluctuate dramatically based on quickly changing market trends. For example, this quarter could be a buyer’s market because the inventory is high, and there is a lot of competition among sellers to have people purchase their properties. However, after only a few months, the market could flip to a seller’s market because a majority of the inventory is now off the market, leaving the few sellers in a more advantageous position.
These measurable shifts make the role of an appraiser all the more important to ensure that the determined property value is an accurate representation of the current market.
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4. How much you can borrow and the lender can loan.
If there is not enough money, there is no deal. For the buyer, this is critical, as the appraisal can verify the amount asked for a particular loan.
As a buyer, before you borrow money to purchase property or refinance, your lender will require a new appraisal. Typically, you receive a copy of the property appraisal and the breakdown of value. The appraiser will either affirm or deny the proposed real estate value, and this can affect approval of your loan.
In a way, this is one of the most valuable aspects of any transaction. Generally, making a deal can be quite positive for all parties involved, as everyone can win. However, in order to do so, the conditions have to be agreed upon by all parties.
5. Evolving real estate market.
According to a recent PwC report, “By 2020, investable real estate will have grown by more than 55 percent compared to 2012.” Additionally, one of the six major trends they foresee is that there will be a “wider range of risk and return opportunities,” particularly in cities undergoing rapid expansion and growth.
These rapid changes will only put more emphasis and importance on having accurate, measured appraisals of real estate properties based on aggregated data and sales comparables. Since more data points will need to be considered in a growing market, Bloomberg actually predicts that robots will eventually replace real estate appraisers. It looks like Skynet will emerge through the real estate sector. Terminator didn’t see that coming.
Jokes aside, all of these elements are important whether you are on the market to purchase a property or looking to sell real estate you currently own. A professional, non-biased real estate appraisal will protect everyone’s interests and ensure that fair market value is met prior to the transaction.
Darius Artiola works on staff at GeoData Plus, an online software that empowers real estate professionals by giving them access to relevant and up-to-date property data.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.