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The purpose of an appraisal is to provide an opinion of market value for a given piece of real estate and any improvements (i.e. structures, such as a home). There are several elements or steps to a residential appraisal, which are described, briefly, below.
The first step is to inspect the property to be appraised (the 'Subject'). During the inspection, the appraiser is primarily concerned with the condition and quality of the subject's construction, features and amenities, particularly those that may contribute to, or detract from, its value. The inspection often includes a sketch of the property, to indicate its square footage and basic layout.
Following inspection, an appraiser may utilize one or more of three possible approaches to value: the cost approach, the sales comparison approach and, in the case of an imcome producing property, the income approach.
In the cost approach, an appraiser uses information and data on local building costs, labor rates and other factors to determine the cost to construct a property similar to the one being appraised. Other mitigating factors, such as location and amenities, are usually not reflected in the cost approach. An important consideration when using the cost approach is that cost often does not equate to value.
Sales Comparison Approach
In the sales comparison approach, the appraiser conducts research of both historic and recent comparable sales, current offers, and pending sales in the subject's vicinity to find properties which are ''comparable'' to the subject. Additional, extensive market research using a wide variety of sources, including a local Multiple Listing Service, local real estate professionals, county courthouse records, private data vendors, and owner interviews, etc. provides an indication of the contributory value of items such as square footage, extra bathrooms, fireplaces, and additional garage capacity, etc. The appraiser then uses these data to adjust the comparable properties to more accurately portray the subject property. This approach to value is intended to mimic the actions of typical buyers and sellers, acting in their own best interets in a typical, arms-length transaction. Because this approach reflects the way actual markets function, it is often the most heavily considered.
This approach is used for income producing properties, such as those that generate rental income. Various methods may be used to provide an indication of value for an income property. One such method or approach, similar to the Sales Comparison Approach, involves the analysis of similar rental properties to the subject and the adjustment of their monthly rental amount for superior or inferior features to the subject. This process provides an indication of the market rent for the subject. When the market rent is divided by the sales price of similar rental properties a Gross Rent Multiplier (GRM) is produced. The GRM is then multiplied by the market rent to provide an indication of value for the subject.
Having employed one or more approaches to value, the appraiser must then reconcile the results to determine which approach most accurately indicates the value for the subject. The values that result from one or more of the approaches above are never averaged to arrive at a final appraised value, but are weighted according to how accurately they reflect a possible value for the subject property. In terms of an overall approach, considerable weight is most often applied to the Sales Comparison Approach as it most accurately reflects the actions of typical buyers and sellers in a typical market transaction.