Real Property Appraisals: A Primer

A home purchase is the most serious transaction many of us will ever make. It doesn't matter if a main residence, a seasonal vacation property or a rental fixer upper, purchasing real property is an involved transaction that requires multiple parties to see it through.

Most of the participants are quite familiar. The real estate agent is the most known entity in the transaction. Then, the bank provides the financial capital necessary to finance the exchange. And the title company sees to it that all areas of the sale are completed and that the title is clear to pass to the buyer from the seller.

To learn more about appraising, click here to see a short video or call us today to talk about your specific property.

So, who makes sure the value of the property is consistent with the amount being paid? In comes the appraiser. We provide an unbiased opinion of what a buyer could expect to pay — or a seller receive — for a parcel of real estate, where both buyer and seller are informed parties. A licensed, certified, professional appraiser from Milstead's Appraisal Service will ensure, you as an interested party, are informed.

Inspecting the subject property

To ascertain the true status of the property, it's our responsibility to first conduct a thorough inspection. We must physically view aspects of the property, such as the number of bedrooms and bathrooms, the location, amenities, etc., to ensure they truly are present and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the square footage is accurate and conveying the layout of the property. Most importantly, we look for any obvious features - or defects - that would have an impact on the value of the property.

Next, after the inspection, an appraiser uses two or three approaches to determining the value of the property: sales comparison and, in the case of a rental property, an income approach.

Cost Approach

This is where we pull information on local construction costs, labor rates and other elements to determine how much it would cost to replace the property being appraised. This figure usually sets the maximum on what a property would sell for. It's also the least used method.

Paired Sales Analysis

Appraisers are intimately familiar with the communities in which they appraise. They innately understand the value of certain features to the people of that area. Then, the appraiser researches recent transactions in the vicinity and finds properties which are 'comparable' to the subject in question. By assigning a dollar value to certain items such as upgraded appliances, extra bathrooms, additional living area, quality of construction, lot size, we add or subtract from each comparable's sales price so that they more accurately portray the features of subject.

  • For example, if the comparable property has a fireplace and the subject doesn't, the appraiser may subtract the value of a fireplace from the sales price of the comparable.
  • If the subject has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

After all differences have been accounted for, the appraiser reconciles the adjusted sales prices of all the comps and then derives an opinion of what the subject could sell for. At Milstead's Appraisal Service, we are experts in knowing the value of real estate features in Knoxville and Knox County neighborhoods. This approach to value is usually given the most weight when an appraisal is for a real estate sale.

Valuation Using the Income Approach

In the case of income producing properties - rental houses for example - we may use a third way of valuing a property. In this situation, the amount of income the real estate generates is factored in with income produced by neighboring properties to derive the current value.

Arriving at a Value Conclusion

Analyzing the data from all applicable approaches, the appraiser is then ready to document an estimated market value for the property at hand. The estimate of value on the appraisal report is not necessarily what's being paid for the property even though it is likely the best indication of a property's valueThere are always mitigating factors such as seller motivation, urgency or 'bidding wars' that may adjust an offer or listing price up or down. But the appraised value is often employed as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth. Here's what it all boils down to, an appraiser from Milstead's Appraisal Service will guarantee you attain the most accurate property value, so you can make wise real estate decisions.