Purpose of a Real Estate Appraisal

by Guy Cozzi

A real estate appraisal is needed to determine the estimated market value of a house, condominium, commercial property, vacant land, etc. It is used to assist someone in making a decision. They may be considering purchasing, selling, insuring, or lending money on a house, condo, commercial property, or vacant lot. Appraisals are also used for tax purposes to estimate how much money a property owner has to pay in taxes.

Here's a summary of some of the services a professional real estate appraiser can provide depending upon their qualifications:

  • Residential and Commercial valuation estimates
  • Estate planning and estate settlements
  • Tax assessment review and advice
  • Advice in eminent domain and condemnation property transactions
  • Dispute resolution - including divorce, estate settlements, property partition suits, foreclosures, and zoning issues
  • Feasibility studies
  • Expert witness testimony
  • Market rent and trend studies
  • Cost/benefit or investment analysis, for example, what will be the financial return of remodeling a house, condo, or commercial property
  • Land utilization studies
  • Supply and demand studies

Banks and mortgage lenders need appraisals to assist them in figuring out how much money to lend someone for a mortgage loan application. There are many different aspects of a loan application that the banker has to consider, but mortgage lenders always require an appraisal since the real estate will be the collateral for the mortgage loan.

People get very emotional and excited about purchasing a house. When they're in this highly emotional and excited state, they tend to just look at the cosmetic appeal of a house instead of the important factors. They forget that they're not buying a CAR, they're buying a HOUSE!! There's a big difference between the two. One is a normal expense everyone has to incur occasionally. The other is the biggest financial decision most people will ever make. By becoming too emotionally attached to a deal, people often pay above market value for a home. This can cost them tens of thousands of dollars in an overpriced purchase. Since a house is such a major financial decision, it's prudent for them not to take any chances. People should try to eliminate as much risk as possible.

A pre-purchase appraisal will inform people of the true market value of a house. This will enable them to make an educated and intelligent decision on whether or not to purchase the home. They will also know the approximate amount to pay for it.

Pre-sale appraisals are recommended. Before someone puts their house up for sale they should have it appraised to estimate the true market value. This will prevent any last minute holdups because of problems found during the buyers' bank appraisal. Any last minute problems will delay the sale or kill the deal altogether.

Homeowners can hire an appraiser to do a feasibility study to assist them before starting home remodeling and renovation work. The appraiser conducting the study analyzes the condition of the property and the cost of the renovations. The appraiser will then prepare an estimate of what the property's value will be after the improvements are made (the improved value will affect the ad valorem real estate tax). This information will enable the homeowner to not spend too much or too little money with the renovations. The appraiser can also investigate whether a property qualifies for historic preservation benefits from Federal and local governments.

Homeowners can hire an appraiser when they need to insure the value of their home. (This is different than private mortgage insurance PMI). The insurable value is the cost of replacing the property if it were destroyed or damaged. This value can used to underwrite fire and hazard insurance on real estate. Although most reputable insurance brokers can tell you if your fire and hazard coverage is sufficient, there are properties that may require a closer examination, such as, older buildings, custom built homes, or properties with unusual features, such as solar energy collectors. An appraiser can give an opinion of the insurable value of the home by using the Cost Approach for their analysis.

Homeowners can hire an appraiser to dispute the amount of their property taxes. Many people don't realize that they can be over charged for their property tax assessments. Homeowners need to hire an appraiser if they believe their property taxes are too high. An appraiser can estimate the market value of their house and then the homeowner can try to have their property taxes reduced.

Homeowners can hire an appraiser if they need to cancel Private Mortgage Insurance (PMI). New homeowners are frequently required to obtain private mortgage insurance, but as a result of legislation passed by Congress in 1998, homeowners can cancel this coverage when their loan to value ratio reaches 80 percent. An appraiser can estimate the current value of the home which will assist the homeowner in deciding whether or not to ask the lender to drop the PMI.

Relocation firms always need real estate appraisals during the process of employees being transferred to a new location by their employers. Sometimes, the relocation firm or employer will purchase an employee's home if the employee is unable to sell the home during a specified time period. A relocation appraisal is an estimate of the anticipated sales price which a home will sell in the current market within a reasonable length of time. The "length of time" in the appraisal valuation depends on the conditions in the area where the home is located. The definition of anticipated sales price indicates "a reasonable marketing period, not to exceed 120 days and commencing on the date of appraisal (inspection), is allowed for exposure on the open market."

Appraisers are needed during property condemnation proceedings, also known as, Eminent Domain. Appraisers often are asked to estimate "just compensation" in situations where the Federal, State or Local governments take ownership of private property for public use. This happens in situations such as, to build a road, public park, expand an airport, etc. The law requires that owners of the condemned property, (property taken by the government in this manner), must be paid a fair price.

Appraisers are also hired to give an opinion of value of property for gift or inheritance taxes, lease rental schedules, and other investment purposes.

© 2007 Guy Cozzi. Get more advice on real estate appraisal, home inspection, energy saving home improvements and real estate investing at Nemmar Real Estate Appraisal.



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