The determination of the value of real estate is essential to the economic well being of society. Real estate appraisal is an estimate of the value of property using various methods. An appraisal is determined with one of three approaches, a cost approach, a comparison approach, or an income approach.
Appraisals are very detailed reports, but here are a few things they include:
1. Details about the subject property, along with side-by-side comparisons of three similar properties.
2. A description and evaluation of the overall real estate market in the area.
3. Statements about issues the appraiser feels are harmful to value or resale, such as poor access to the property.
4. Notations about seriously flawed characteristics, such as a crumbling foundation.
5. An estimate of the average sales time for the property.
6. What type of area the home is in (development, stand alone acreage, etc.).
Cost Approach
The cost approach is most useful for new properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed. Your personal approval is accomplished early in the loan process, but final loan commitment usually hinges on a satisfactory appraisal. The bank wants to be sure its investment is covered in case you default on the loan.
Sales Comparison Approach - The appraiser estimates a subject market value of property by comparing it to similar properties that have sold in the area. The properties used are called comparables.
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