Appraising Overview
What is an Appraisal? An appraisal is the act or process of developing an opinion of value (expressed numerically as a specific amount) through appraisal practice.
How is an appraisal formed? This opinion of value, made by an appraisal is found through a formal process that typically utilizes three approaches to value: 1) Sales Comparison Approach, 2) Cost Approach and 3) Income Approach.
1) The Sales Comparison Approach is the most commonly used approach. This approach takes into consideration the comparison of homes that have recently sold (usually within one year), that are similar to the property the appraiser is appraising. Adjustments are made to the comparable sales (based on market extraction and paired sales analysis through primary and secondary pairing, interviews with builders and other appraisers) for differences in location, lot size, age, room count, square footage, basement size and finish, heating and cooling, garage size and any other amenities the property may have. These adjustments are not cost figures and based only on items that are attached to the home as realty. The appraiser then derives an adjusted sales price for each comparable and an opinion of value is determined based off these adjusted sales prices. The Sales Comparison Approach is the most reliable approach and best indicator of value for a home as it takes into consideration the motives of a typical buyer and seller in a market.
2) The Cost Approach is another approach to value an appraiser uses to derive at an opinion of value of a property. It takes into consideration what the improvements would cost less any physical depreciation, plus the land value. This approach is commonly used for homes that are newer in age. Determining an effective age of a property that is older is too subjective and can be potentially inaccurate when determining depreciation; therefore the Cost Approach is not an approach typically used for older homes.
3) The Income Approach is the third approach utilized and is mainly used for determining the market value of income-producing properties. The opinion of value is derived on what an investor would pay based on the amount of income a property would possibly generate.
What is Market Value? The definition of market value per the uniform standards of professional appraisal practice means the most probable price which a property should bring in a competitive and open market under all conditions requisite for a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions where by: buyer and seller are typically motivated, both parties are well informed or well advised, and acting in what they consider their own best interests, a reasonable time is allowed for exposure in the open market, payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto: and the price represents the normal consideration for the property unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Definition of Basement Finish according to FannieMae: Basement finish is a room or rooms built partially or completely below grade level. A level is considered below-grade if any portion of it is below-grade-regardless of the quality of its finish or the window area of any room.A walk-out basement with finished rooms would not be included in the above-grade room count. The appraiser must report the basement or other partially below-grade areas separately and make appropriate adjustments for them on the "basement and finished areas below-grade" line in the sales comparison analysis grid. To ensure consistency in the sales comparison analysis, appraisers must compare above-grade areas to above-grade areas and below-grade areas to below-grade areas.
ANSI (American National Standards Institute) classifies finished as an enclosed area in a house that is suitable for year-round use, embodying walls, floors, and ceilings that are similar to the rest of the house.