Topic #6: Overview of a Real Estate Appraisal

Real estate appraisal is the act of having a qualified appraiser determine the value of real property. Now I know that after I read that definition the next thought that popped into my mind was, "How do you quantify value?". Well come to find out, they generally mean market value when doing appraisals. Here's the definition.

Of course there are several different kinds of appraisal. There is appraising for tax purposes, appraisal done fore foreclosure, residential appraisal and commercial appraisal. Depending on the kind of appraisal being done there are several different methods used to find value.

If the property being sold is not something that is usually sold or is a unique property, the best approach to valuing it is the cost approach. In a nut shell, this approach takes the current value of the building (cost to build it minus depreciation) and then takes into account any profits that would be made by the property to determine the final value.

If the property is a residential property that is being sold in a neighborhood that has seen houses sell previously, many times the appraiser will compare the square footage (among other things) to the final sale price of the other properties. This method is known as the sales comparison method.

For a commercial property, the value of the property is usually determined by the income streams that the property will provide. To find that, there are two methods: Direct Capitalization and Discounted Cash Flows.
Direct capitalization is the relationship between one year's income and the value of the property.
Discounted cash flows are a projection of the potential earnings of the property discounted back to the present.

Here is a video that summarizes the appraisal process.