What is an appraisal?

An appraisal is an individual’s opinion or estimate of a property’s value on a specific date, reduced to writing in an appraisal report. The appraisal report contains data collected and analyzed by the appraiser which substantiates the appraiser’s opinion of the property’s value. [See RPI Form 200] The value of a parcel of real estate, given as a dollar amount, is the present worth to an owner of the future flow of net operating income (NOI) generated by the property.

Factors used in an appraisal process to determine a property’s value include:

  • demand – the number of buyers for the property;
  • utility – the property’s possible uses;
  • scarcity – the availability of similar properties; and
  • transferability – the seller’s ability to transfer good title to a buyer clear of all encumbrances itemized in a title insurance policy.

These are known as elements of value and can be memorized under the acronym of DUST.

Further, there are forces that influence value, including:

  • physical considerations – the property’s proximity to commercial amenities, access to transportation, the availability of freeways, beaches, lakes, hills, etc.;
  • economic considerations – rents in the area, vacancies and the percentage of homeownership, as well as employment opportunities lost or gained;
  • government considerations – property taxes, zoning, building codes and local services such as police and fire protection; and
  • social considerations – crime rates, school ratings, shopping and recreational opportunities.

These forces which influence value can be memorized with the acronym of PEGS.

Factors not used to determine a property’s value include the present owner’s:

  • acquisition cost;
  • listing price;
  • mortgage financing; and
  • equity in the property.

There are many different types of values assigned to a property. In real estate appraisal, the most common type of value used is market value, also called fair market value (FMV). The FMV of a property is the highest price on the date of valuation a willing seller and buyer would agree to, both having full knowledge of the property’s various uses. [Calif. Code of Civil Procedures §1263.320]

Steps in the appraisal process

The appraisal process consists of six steps:

  • identifying and defining the appraisal effort to be undertaken by the appraiser;
  • data collection;
  • analyzing the data;
  • applying the three appraisal approaches;
  • reconciliation and final valuation of the property; and
  • producing the complete report.

Analyzing the data

There are three approaches to estimating value in an appraisal:

  • market approach;
  • cost approach; and
  • income approach.

Under the market comparison approach, the appraiser looks at the current selling prices of similar properties to establish the comparable value of the property appraised. Adjustments are made for any differences in similar properties, such as their location, amenities and condition.

For the cost approach, the appraiser sets a property’s value by calculating the construction cost to replace the improvements at today’s prices.

Under the income approach, the appraiser determines the property’s value based on future income and operating expenses of the property.

As part of the appraisal process, the appraiser reconciles of values arrived at under each of the three appraisal approaches, selecting the most appropriate value based on the property and objective of the appraisal.

History behind the word

The word appraisement first appeared in the early 1640s. The word evolved into appraisal by 1784 in the United States, with the meaning “setting of a price, valuation.”