What is An Appraisal

An appraisal is a process which leads to an estimate of Market Value for a specific property. This includes an analysis of the property, defining all its physical characteristics, analyzing the market area and the economics of said market area. These, in concert, allow the appraiser to then search out sales of properties which are most similar to the subject, and estimating value from these sales. Commercial properties are also generally analyzed in terms of rental income they can obtain. This income stream is refined to a value estimate. We then reconcile a final estimate of “Market Value.”

Market Value is defined as: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale; the buyer and seller, each acting prudently, 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:

  1. Buyer and seller are typically motivated.
  2. Both parties are well informed or well-advised and each is acting in what he considers his own best interest.
  3. A reasonable time is allowed for exposure in the open market.
  4. Payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto.
  5. The price represents a normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

Note that in the process of performing an appraisal, whether it be for a purchase or refinance transaction, we assume that the property is being sold, and that we, as appraisers, are attempting to replicate the actions of typical buyers and sellers. In essence, what would one pay for this property? In that regard, we perform investigations for due diligence, as would a purchaser, to determine what we, assuming we were buyers seeking such a property, would pay.

We note that these investigations include property size, quality, location, condition, zoning, lot size and shape, neighborhood, topography, available utilities, and potential detriments such as flood plains, wetlands, and any adverse encroachments or easements.

The basis of all appraisal value is “Highest and Best Use.” This is the premise upon which all value is based. For a typical residential property in a development, this is generally always as a residence. For commercial properties, zoning is relative, but a property might be
under- or over-improved for the site or zoning. In these cases, highest and best use might be a different use than that which the property is currently used. This analysis can be very lengthy.