An appraisal is an opinion of the value of a property. Generally, an accredited appraiser documents this estimate in a written report.
Contents of an appraisal
Most importantly, appraisers base their findings on an expert analysis of the property. In addition, though, an appraisal includes:
- market conditions,
- comparable properties, and
- economic trends nationally and locally
Appraisers are independent third parties who either earn a fee or receive a salary. The job requires specialized training and credentials.
And certainly, real estate prices move up and down, sometimes very quickly. An appraisal, then, is valid only as of a specific date.
The Institute of Real Estate Management lists four common methods. Consequently, an appraisal could use any or all depending on the data available. The cost approach starts with the value of the land and adds in the net value of improvements. Next, the market approach compares the property to similar ones that have been sold recently. The income capitalization approach, then, focuses on the property’s net operating income. Lastly, the discounted cash flow method calculates all future financial benefits of an investment property over the expected holding period.
Importantly, an appraisal differs from an assessment. That’s a similar exercise performed by the local government to determine the property’s value for tax purposes. Incidentally, the official who performs this function is an assessor, not an appraiser.