An appraisal of real estate is the valuation of the rights of ownership. The appraiser does not create value, the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning.
An appraisal is an opinion of value or the act or process of estimating value. This opinion or estimate is derived by using three common approaches, all derived from the market.
- The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the physical deterioration, the functional obsolescence and the economic obsolescence. The remainder is added to the land value.
- The comparison approach to determining value makes use of other "benchmark" properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property.
- The income approach to determining value is of primary importance in ascertaining the value of income producing properties and has little weight in residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.
Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated.
Due to the many types of value, such as fair market value, insurance value, tax value, and value in use, the need to precisely define the purpose of the appraisal is essential.