- The process of estimating the market value of property is called an appraisal. Appraisals are performed by appraisers who are typically licensed by the state. They determine the market value of a subject property by implementing established methods and making professional judgments. An appraisal value indicates what a ready and willing buyer might pay for the property. For example, if a buyer is willing to buy a piece of property for a specific amount yet cannot complete the purchase, one cannot say the property is worth the specific amount, because the prospective buyer was not able to complete the transaction.
- The appraiser must find comparable properties that have sold recently in the neighborhood or nearby vicinity to the subject property. These comparable houses must have sold in recent history, ideally within the last 6 months. They must be properties that are located in the same neighborhood as the property being appraised or similar neighborhoods within a close proximity. Depending on the region, appraisers will try to keep within a specific radius to the appraised property. Licensed appraisers will typically have access to data on sold properties.
- Appraisers will compare the recently sold properties with the subject property. Appraisers will look for comparable houses that are a similar age and style and that have similar amenities to the subject property. They attempt to find comparable properties that are a similar size, within 200 square feet, to the house being appraised. An ideal comparable would be a house in the same housing tract, with the same floor plan, built the same year as the subject property.
- Adjustments are made to the comparable sold prices to make them more comparable to the subject property. Since two houses may have differences (such as one having a swimming pool), the appraiser will need to add or subtract from the sold price to get a realistic comparable value. For example, if the comparable house has a block wall and the subject property does not, the appraiser will deduct the value of the wall from the sold price. If the situation is reversed, the appraiser will add the value of the wall to the sold price. The value of these amenities will be based on the appraiser's experience and knowledge of the area's market conditions and will not necessarily be the original or replacement cost of the amenity.
- The adjusted sold prices will be averaged to help determine the market value of the subject property. Before averaging the prices of the sold properties, the appraiser might eliminate the highest or lowest sold, especially if it is an unusual condition. For example, if one of the comparable properties was sold far below market value because the buyer and seller were related, then that comparable could be eliminated from the mix. Adding the sold prices and then dividing that amount by the number of comparable properties will give an estimate of the property's market value.
