The Art and Science of Real Estate Appraisal

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The Art and Science of Real Estate Appraisal

Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value for real property (usually market value). Appraisals are used in mortgage loans, settling estates and divorces, taxation, investment decisions, and determining lending amounts.

A well-trained appraiser is able to collect and analyze the data, select appropriate comparable sales and calculate an accurate projection of value in that particular market.

Subjective Values

While there are a fair amount of factual details that go into real estate appraisals, much of the process is subjective. This is largely because the majority of property values are determined by a price-per-square-foot figure.

To arrive at this, appraisers use data from recent sales of properties similar to the one they’re evaluating (called “comparables”). Picking which comparables are most appropriate to a given property can be a matter of opinion and personal judgment.

Some of this personal judgment has been alleged to have racial undertones. As a result, some home sellers have gone so far as to remove family photos, books written by Black authors and other identifiers from the room where their appraisal is taking place in order to minimize any potential bias.

In addition, a number of professional appraisal organizations have denied any link between racism and property valuations. The reality is, though, that a certain degree of subjectivity will always be involved in real estate appraisals.

Quantitative Values

Real estate appraisers use different methods to arrive at an estimate of a property’s value. One method is the sales comparison approach, which compares a property with similar properties that have recently sold. This method allows the appraiser to make adjustments for things like size, comparable features, and location – all of which can have a significant impact on value.

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Another approach is the cost approach, which takes into account the amount of money it would take to replace a property if it were destroyed. This method has its shortcomings, though, including high appraisal costs and the fact that it can deviate from market prices.

Finally, there is the hedonic price approach, which estimates a property’s value using regression models and hedonic regression parameters. This method is fast, accurate, and scalable. It also does not suffer from the subjectivity that is inherent in other approaches. It is considered the future of appraisal.

Appraisal Methods

Real estate appraisals are used by mortgage lenders to establish market value – the price that property would bring in a competitive and open marketplace. An appraiser will use as much objective data and rigorous calculation (“science”) as possible to come up with a fair appraisal of a property, but there is still subjective opinion and interpretation (“art”) involved.

There are three main methods for determining a property’s value: sales comparison, cost and income. Each method has its own benefits and drawbacks.

Appraisers will choose the most appropriate method for the type of property being valued. For example, a residential appraisal will probably use the sales comparison approach, while an office building or apartment complex might lean more toward the income approach.

Appraisal Reports

A real estate appraisal is a written summary of the value of property. It’s usually used to obtain a mortgage loan, settle an estate or divorce, or for tax purposes. Real estate appraisers must follow guidelines to ensure their reports are accurate and objective.

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To come up with the value of a home, an appraiser studies local market trends and estimates how the subject property fits in. They also stay informed about local construction standards, zoning laws, and any other issues that might affect the home’s value.

An appraiser’s “science” data includes sales of comparable homes that are similar in size, location and recent sales. He then applies his more subjective view to evaluate features like quality of design, functional obsolescence and the desirability of the neighborhood.

The final step in the process is putting all of this information into a report. The report should include an effective date, a legal description of the property, photos of the sales comparables and the subject, adjustment grids, a reconciliation and written certification.

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