People ask us all of the time... how does a real estate appraiser determine value?
Great question. Ultimately the question an appraiser is tasked with answering is this: if this property goes on the market right now and is exposed to a reasonable time on the market, how much will it most likely sell for? That simple! And... that complicated. To that end, appraisers rely on primarily what is called the principle of substitution and begin searching for evidence to make their case. Once the appraiser fully understands the property they are appraising, then they search to find what is referred to as: comparable sales, commonly referred to as "comps."
The appraisers search for the best possible comps they can find to include as their value evidence in the appraisal report. In this search, appraisers are looking for comps that sold recently, in the same neighborhood or a nearby similar neighborhood. They look for properties that are as similar as possible and consider size, style, age, condition, etc. Once the appraiser has identified the comps that they believe makes their best case for substitution, they place them into their report and begin closely evaluating the differences between the property they are appraising (referred to as the "subject" property) and the comparable properties. They adjust the sales price of each comparable based on those differences to show the differences they find and to get the best idea they can about what that comp would have sold for if it were more like the subject.
Once they have lined up all their comps, determined all of their adjustments, then they typically decide which of the comps they want to give the most "weight" to. In other words, which of these comps really is the best representation of what the subject property should sell for? Then, the appraiser relies upon their expert opinion to determine what they believe the value is, based strictly on their in depth analysis of the evidence.
The above approach to determining value is what is called the Sales Approach. Residential appraisers also can consider the Cost Approach, and the Income Approach... although the Sales Approach typically provides the most value determining credibility.
Great question. Ultimately the question an appraiser is tasked with answering is this: if this property goes on the market right now and is exposed to a reasonable time on the market, how much will it most likely sell for? That simple! And... that complicated. To that end, appraisers rely on primarily what is called the principle of substitution and begin searching for evidence to make their case. Once the appraiser fully understands the property they are appraising, then they search to find what is referred to as: comparable sales, commonly referred to as "comps."
The appraisers search for the best possible comps they can find to include as their value evidence in the appraisal report. In this search, appraisers are looking for comps that sold recently, in the same neighborhood or a nearby similar neighborhood. They look for properties that are as similar as possible and consider size, style, age, condition, etc. Once the appraiser has identified the comps that they believe makes their best case for substitution, they place them into their report and begin closely evaluating the differences between the property they are appraising (referred to as the "subject" property) and the comparable properties. They adjust the sales price of each comparable based on those differences to show the differences they find and to get the best idea they can about what that comp would have sold for if it were more like the subject.
Once they have lined up all their comps, determined all of their adjustments, then they typically decide which of the comps they want to give the most "weight" to. In other words, which of these comps really is the best representation of what the subject property should sell for? Then, the appraiser relies upon their expert opinion to determine what they believe the value is, based strictly on their in depth analysis of the evidence.
The above approach to determining value is what is called the Sales Approach. Residential appraisers also can consider the Cost Approach, and the Income Approach... although the Sales Approach typically provides the most value determining credibility.