What is an Appraisal?
An appraisal is an opinion of value from a licensed or certified appraiser. The Appraisal Institute states on their website:
An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and farms. The reasons for performing a real property appraisal are just as varied. They are usually required whenever real property is sold, mortgaged, taxed, insured, or developed. For example, appraisals are prepared for:
- Mortgage lending purposes
- Tax assessments and appeals of assessments
- Negotiation between buyers and sellers
- Government acquisition of private property for public use
- Business mergers or dissolutions
- Lease negotiations
The opinion of value is typically based on the sales comparison approach, which is where the appraiser analyzes sold properties that are geographically and physically similar to the property they are appraising. The appraiser can also value the property based on cost approach and income approach, but these are used much less used for single family homes.
The process makes sense because typically buyers are looking in a certain area and analyzing several homes on the market. They are seeing which home they like the best and what price they want to offer. The appraiser is essentially doing the same thing, but analyzing every aspect and adjusting for it. Most of the time the process if accurate. However, it is based on the quality of the sales data and the information available. If the information is not great, then the appraisal will be less credible.
I get asked all the time, “Is Zillow accurate”. Or “Zillow says my property is worth $XXX,XXX.” The truth is Zillow has a great product, but it many times cannot account for information that is now known. Zillow most likely doesn’t know the level of quality or upgrades on the interior. The interior is one of the major components of a home. Completely renovated homes can sell for hundreds of thousands more than unrenovated homes. Hence, why there are so many fix and flippers out there today. So, my experience has been that Zillow is a great starting point, but appraisers dig into the details more. That being said, I am sure there will come a day where technology will replace a large majority of appraisers.