Real Estate Appraisals: A Primer

So, what party makes sure the property is worth the amount being paid? This is where the appraiser comes in. We provide an unbiased estimate of what a buyer might expect to pay — or a seller receive — for a property, where both buyer and seller are informed parties. A licensed, certified, professional appraiser from NELSON BOSWELL, LLC will ensure, you as an interested party, are informed.

The inspection is where an appraisal begins

Our first responsibility at NELSON BOSWELL, LLC is to inspect the property to ascertain its true status. We have unique capability here:  Mr. Boswell is a real estate appraiser and certified general contractor.  We look to those things that do or do not create value that are specific to the property itself, and external to the property.  As to the property itself, we look at the things that matter to the real estate market in question such as quality of construction and condition of the buildings and other improvements on the site.  We analyze deeper issues that matter to the market from a standpoint of functionality, a term of art referring to the value the market places on updating, refurbishments, renovations, remodeling and to the extent the market places value on these characteristics.  In other words are they state-of-the-art, or dated.  Then we analyze in detail the site on which the buildings are located.  As to those things contributing value external to the property we analyze the local economy:  What creates demand in the general market area and in the neighborhood such as inventory, rates of absorption, population growth rates and the presence of supporting facilities and employment centers.   

Once the site has been inspected, an appraiser considers three approaches to determining the value of real property: market value based on sales comparison; cost to build plus land value, and value based on rental income production.  At least one will be an appropriate indication for the subject property, if not all three.

Sales Comparison Approach

The sales comparison approach is based on the economic theory of substitution.  Simply stated, a purchaser will pay no more to acquire something than what it costs to acquire a competing product.  Here, comparable sales (substitutes) with characteristics important and having value to the market are compared to the subject property characteristics.  If a comparable sale has a characteristic that is superior to the subject property, the comparable sale is adjusted downward for that characteristic.  If the comparable sale is inferior to the subject property in a particular characteristic it is given an upward adjustment.  For example, say the subject property (the property being appraised) does not have a pool.  All else being equal, if a comparable sale sells for $300,000 with a pool, and the market places a value of $30,000 on that pool the comparable sale would be given an a downward market adjustment of $30,000 resulting in that comparable sale as having an indicated value for the subject property of $270,000.  If the situation is reversed, i.e. the subject property does have a pool, but the comparable sale does not, and buyers still place a market value of $30,000 on the pool:  Here, assume the comparable sale sold for $270,000.  In comparison to the subject property that does have a pool, the comparable sale would be given an upward market adjustment of $30,000 resulting in that comparable sale having an indicated value for the subject property of $300,000.  This same rationale applies to other characteristics where the market places value including but not limited to differences in site characteristics, structural characteristics, amenities, condition, obsolescence, location and when the sale sold.


Replacement Cost or Reproduction Cost

Here, we analyze information on local building costs, the cost of labor and other factors to calculate how much it would cost to replace the property being appraised.  If the subject property is not new, we estimate what is called "accrued deprecation."  Accrued depreciation takes into account all forms of depreciation: physical deterioration and obsolescence.  The result is called the "depreciated value of the improvements."  Next we estimate the land value.  Combining the depreciated value of the improvements and the land value yields the indicated value of the subject property using the Cost Approach.

Valuation Using the Income Approach

A third method of valuing a property is sometimes employed when a neighborhood has a reasonable number of rental properties. In this scenario, the amount of income the real estate produces is factored in with income produced by comparable properties to give an indicator of the current value.

Reconciliation

Combining information from all approaches, the appraiser is then ready to document an estimated market value for the subject property. Note: While this amount is probably the most accurate indication of what a property is worth, it may not be the price at which the property closes. There are always mitigating factors such as seller motivation, urgency or 'bidding wars' that may adjust an offer or listing price up or down. But the appraised value is typically employed as a guideline for lenders who don't want to loan a buyer more money than they could get back in case they had to sell the property again. It all comes down to this, an appraiser from NELSON BOSWELL, LLC will help you get the most fair and balanced property value, so you can make wise real estate decisions.