Making Sense of the Appraisal Process

A home purchase is often the largest single investment most people will ever make. Whether it’s a primary residence, a second home, a vacation property, or an investment, buying real estate is a complex financial transaction that requires several professionals to work together.

Most of these roles are familiar. The Realtor is typically the most visible participant, guiding buyers and sellers through every step. The mortgage company provides the financial capital needed to fund the purchase. The title company ensures that all requirements are met so that a clear, marketable title transfers from seller to buyer.

But who ensures that the property’s value is in line with the price being paid? In a transaction involving so many parties—and so much financial exposure—it’s essential to confirm that the property’s value is truly commensurate with the purchase price.

That’s where the appraisal comes in.

An appraisal is an unbiased, professional estimate of a property’s market value—what a well-informed buyer might reasonably expect to pay, and what a well-informed seller might expect to receive. To provide this assurance, most people rely on a licensed, certified appraiser who brings the training, expertise, and objectivity needed to determine the most accurate representation of a property’s true value.

To learn more about appraising, click here to see a short video or call us today to talk about your specific property.

So, who makes sure the property is worth the amount being paid? In comes the appraiser. We provide an unbiased opinion of what a buyer could expect to pay — or a seller receive — for a property, where both buyer and seller are informed parties. A licensed, certified, professional appraiser from Prudhomme Real Estate & Appraisal Group will ensure, you as an interested party, are informed.

Inspecting the subject property

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 features, such as the number of bedrooms, bathrooms, the location, and so on, 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 site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.

Replacement Cost

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 home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.

Sales Comparison

Appraisers get to know the subdivisions in which they appraise. They thoroughly understand the value of particular features to the homeowners of that area. Then, the appraiser researches recent sales in the area and finds properties which are 'comparable' to the subject being appraised. Using knowledge of the value of certain items such as remodeled rooms, types of flooring, energy efficient items, patios and porches, or additional storage space, we adjust the comparable properties so that they are more accurately in line with the features of subject.

For example, if the comparable property has a storm shelter and the subject doesn't, the appraiser may deduct the value of a storm shelter from the sales price of the comparable home.
However, if the subject property has an extra half-bathroom and the comparable does not, the appraiser might add an amount to the comparable property.

A true estimate of what the subject could sell for can only be determined once all differences between the comps and the subject have been evaluated. At Prudhomme Real Estate & Appraisal Group, we are an authority in knowing the value of particular items in New Orleans and Orleans County neighborhoods. This approach to value is commonly awarded the most consideration when an appraisal is for a real estate exchange.

Valuation Using the Income Approach

A third way of valuing real estate is sometimes used when an area has a measurable number of rental properties. In this case, the amount of revenue the real estate produces is factored in with income produced by comparable properties to derive the current value.

Reconciliation

Combining information from all 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 appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.