What is an appraisal

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The purchase of real property is a complex financial transaction that will usually require multiple parties.

Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.

There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.

This is where the appraisal comes in. An appraisal is an unbiased third party that provides and opinion of value based on factual data of what a buyer might expect to pay and a typical seller may expect to receive for such real property, known as (market value). There are other values such as tax assessement value and insured value but the typical transaction is known as fair market value.

Market value is the typical value sought that represents a typical buyer and typical seller, each acting in their own best interest without any undue stress from either party. This is where the appraiser would provide the most accurate estimate value of real property.

The Appraiser and Levels of Licensing

Know who you are hiring for appraisal services.
There are different levels of appraisal licensing. Therefore, when choosing an appraiser, it is important to verify the experience and the knowledge of the appraiser. The Indiana Professional Licensing Agency can provide you with appraiser who are or who have been licensed within the State of Indiana. Here you can search by name, license number, other information and track the current status and the experience of an appraiser.

The level of licensing, as a rule, will indicate how much experience and training that any  appraiser has.

The first level of licensing is the Appraiser Trainee License. This license has completed the minimum schooling and testing for the State. This level of licensing requires supervision of a senior and licensed appraiser, the supervisor is responsible for the trainee and accepts responsibility for such.

The next level of licensing is the Certified Residential Appraiser License. This level of licensing has completed all of the requirements such as appraisal on the job hours, and additional testing by the State to receive such license. This license is the more typical allowing for most types of residential appraisal assignments with some limitations as well as limitations of some commercial appraisal assignments. In addition, there are levels of college degrees that will allow a person holding this license to obtain certain designations which indicate higher levels of education and specialties in residential appraisal practice.

The third and final level is that of a Certified General License. This level of licensing has completed all the requirements for commercial appraisal assignments and additional testing by the State to receive such license. The level of appraisal assignments is only limited to the appraiser themselves with regard to having knowledge and competence to complete the assignment. Like the Certified Licence, there are certain levels of education and certifications indicating that certain persons holding this license have higher levels of education and specialties in appraisal practices. 

This is where I am happy to inform you that I am a Certified General Appraiser and have been licensed as such since 2008, with my training for such beginning in 2004.  I have the experience and the competence to complete a large variety of appraisal assignments.  

The Inspection
There is a variety of inspection types. The more typical is where the appraiser inspects the property to be appraised to ascertain the status of that property. Physically view the features, condition, and the like to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the house.

Once the property has been inspected. The appraiser then determines the method to which the property is to appraised. There are three approaches to determining the value of any real property: The Cost Approach, The Sales Comparison or Market Approach and The Income Approach.

The three approaches to value.

Cost Approach
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach. The Cost Approach is most applicable when applied to new construction and may not be credible or applicable for older and depreciated improvements.

Sales Comparison or Market Approach
Typical buyers and sellers as well as appraisers rely on the sales comparison approach to value most real estate of residential forms. The appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''reasonably comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

Income Approach
In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Combining information from all the approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth. The bottom line is: an experienced appraiser has the abilitly to get the most accurate value, so you can make the most informed real estate decisions.