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A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a vacation home or an investment property, the purchase of real property can be a complex financial transaction involving multiple parties.
The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction and the title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
It is the appraiser who is relied upon by the lender to determine if the value of the property is in line with the amount being paid and therefore adequate security for the mortgage. An appraisal is ordered by the lender and the appraiser develops an appraisal report. An appraisal is defined as the act or process of developing an opinion of value. The appraiser is expected to perform the valuation service competently and in a manner that is independent, impartial and objective.
While there are many types of "value" and purposes for an appraisal, the appraiser is engaged in most real property appraisal assignments for the purpose of developing and reporting his or her opinion of market value .
The most common definition of market value utilized in residential appraisal reports is as follows:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeabley and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and acting in what they consider their best interests; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
This definition of market value is per the Financial Institutions Reform, Recovery, and Enforcment Act of 1989 (FIRREA) and is required in all appraisals for Federally related transactions involving GSEs such an Fannie Mae and FHA.
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see the features of the property, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and to assess the condition of the improvements. The inspection often includes a sketch of the property with measurements which conveys the layout of the property and ensures the proper square footage can be calculated. The appraiser also makes note of any beneficial features - or defects - that would have an affect on the overall value of the house.
Once the site has been inspected, an appraiser will consider using one, two or all three of the following approaches to determining the value of real property: the cost approach, a sales comparison approach and, in the case of a rental property, the income approach to value.
The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to reproduce or replace the property being appraised. It is thought that this value will set 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 home instead? Market data may reveal a higher or different value than that indicated by the cost approach. This is especially true with older homes where it can be difficult to estimate depreciation, an integral component in the cost approach calculation. The cost approach is most applicable when valuing new or proposed construction.
Appraisers typically rely most heavily on the sales comparison approach. The sales comparison approach is the most reliable approach to value for most residential real estate properties. Appraisers get to know the neighborhoods in which they work. Through experience and market data analysis the appraiser gains an understanding of the value that market participants place on the various elements of the subject property and amenities within a given market area. The appraiser researches recent sales in the market area to find properties which are ''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, upgrades or recent updates (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.
In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property, the income approach. 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 approaches, the appraiser is then ready to stipulate an opinion of 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 equal to the final sales price in a purchase transaction. 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. A Certified Real Estate Appraiser will provide the most unbiased and accurate opinion market value so that well informed real estate decisions can be made for any purpose.
We know Northern Virginia real estate values.
You can trust and depend on Erol Sevin and the Certified Appraisal Group, LLC to provide superior quality residential real estate appraisal reports to meet all of our needs.
Contact Us today at 703-451-2241 for Certified Appraiser Service in the following markets:
Fairfax County, Loudoun County, Prince William County, Arlington County, Alexandria City, Fairfax City, Falls Church City, City of Manassas and Manassas Park.
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