How to Appraise Real Property Value
Let's begin with defining the terms "appraise" and "real property." An appraisal is "an estimate of fair market value" as of a given date. Note the word "estimate" in the definition. Appraisals are not an exact science, merely an opinion. Real property is considered to be "land, and anything affixed to it." This is as opposed to "personal property," which is everything else. Once the terms are defined, we can begin to understand the process. Although there are many different classes of real property, the appraisal process is essentially the same in all cases.
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Instructions
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The Appraisal Process
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Perform a visual inspection of the property. Public records might indicate the property is a three-story, 20-unit apartment complex, but in reality it's only two stories containing 10 units. Appraisers assess the overall condition of the property, take photographs of both the interior and exterior and measure the perimeter of the structure to ascertain square footage. Once the inspection is complete, he moves on to the next step in the process.
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Check with the local Planning Department or other government agency to determine the zoning for the property. Zoning regulations determine the "highest and best use" for the property, a critical piece of information. Once the zoning has been determined, the appraiser can evaluate comparable sales.
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Most professional appraisers subscribe to, or have access to, numerous data providers. Some common resources include Loopnet, CoStar, and MLS as well as local brokers and agents with whom they've developed relationships. Non-professionals might have difficulty accessing this information.
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Comparing the subject property to other similar, recently sold properties is one method of valuing real property. It is commonly called the sales comparison approach. Adjust recent sales to make them as similar to the subject property as possible. Some adjustment factors include quality, location, age, condition, view, upgrades/remodeling, additions, square footage, landscaping and amenities like a pool or spa.
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For income-producing properties, apply the income approach. The income approach looks at market rents for property similar to the subject property. For example, a retail store in a strip shopping center is compared to similar, recently rented or available establishments. An apartment building housing two-bedroom, one-bath units is compared to other properties with two-bedroom, one-bath units. Rents are calculated on a price-per-square-foot basis. Again, make adjustments to make the comparables as similar to the subject property as possible.
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If you use only the sales comparison approach, reconcile value to the property most similar to the subject property. An appraiser does not average the adjusted values to arrive at a value conclusion. If the appraiser employs both methods, he reconciles value to the approach deemed most applicable to the subject property.
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Tips & Warnings
Appraising real property values requires a high level of education, experience and resources. Appraisers must be licensed and attend continuing education classes throughout their careers. It would be difficult for an amateur to attempt this process with any degree of accuracy or reliability. Contact a licensed, professional appraiser in your area if you need a real property appraisal.
