Making Sense of the Appraisal Process

A home purchase can be the most serious investment most people could ever encounter. Whether it's a primary residence, a seasonal vacation property or one of many rentals, purchasing real property is a complex transaction that requires multiple parties to pull it all off.

The majority of the participants are very familiar. The real estate agent is the most known entity in the exchange. Then, the lender provides the money necessary to finance the exchange. The title company sees to it that all details of the exchange are completed and that the title is clear to pass from the seller to the buyer.

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So, who's responsible for making sure the property is worth the amount being paid? In comes the appraiser. We provide an unbiased opinion of what a buyer might expect to pay — or a seller receive — for a property, where both buyer and seller are informed parties.

Inspecting the subject property

To determine an accurate status of the property, it's our responsibility to first conduct a thorough inspection. We must physically see features, such as the number of bedrooms and bathrooms, the location, and so on, to ensure they truly are present and are in the shape a reasonable buyer would expect them to be. The inspection often includes a sketch of the floorplan, ensuring the square footage is accurate and conveying the layout of the property. Most importantly, we identify any obvious features - or defects - that would have an impact on the value of the house.

Once the site has been inspected, there are three approaches to determining the value of real property: a comparable sales analysis, a replacement cost calculation, and an income approach when rental properties are prevalent.  The appraiser makes the determination of which approaches to value are appropriate.

Replacement Cost

This is where the appraiser pulls information on local construction costs, labor rates and other elements to figure out how much it would cost to construct a property similar to the one being appraised. This estimate commonly sets the maximum on what a property would sell for. It's also the least used predictor of value, mainly because it is only applicable for new construction or newly-constructed homes.

Sales Comparison

Appraisers are intimately familiar with the neighborhoods in which they appraise. They thoroughly understand the value of particular features to the homeowners of that area. Then, the appraiser researches recent transactions in close proximity to the subject and finds properties which are 'comparable' to the home at hand.  

In the end, the appraiser reconciles the adjusted sales prices of all the comps and then derives an opinion of what the subject could sell for. At Mallory Appraisals, we are experts in knowing the value of real estate features in Memphis and Shelby County neighborhoods. The sales comparison approach to value is most often awarded the most consideration when an appraisal is for a real estate exchange or refinance.

Valuation Using the Income Approach

In the case of income producing properties - rental houses for example - the appraiser may use an additional method of valuing a property. In this case, the amount of income the property generates is taken into consideration along with income produced by neighboring properties to give an indicator of the current value.  If there is a lack of available rental data, the appraiser must determine, in their opinion, if this approach is applicable.

Putting It All Together

Combining information from all approaches, the appraiser is then ready to document an estimated market value for the property at hand. The estimate of value at the bottom of the appraisal report is not necessarily what's being paid for the property.  There are always mitigating factors such as the seller's desire to get out of the property, urgency or 'bidding wars' that may adjust the final price up or down. Regardless, the appraised value is often employed 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 from Mallory Appraisals will help you attain the most accurate property value, so you can make profitable real estate decisions.