The value of a house, business, office location or rental property is calculated using a variety of methods and any given property’s value can be different depending on its intended use or on the reason for the valuation. Such methods to determine the approximate legitimate value for any property is called a home appraisal. The need for appraisals arises from the heterogeneous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location – which is one of the most important determinants of their value. Out of the many important procedures that you would undertake as part of a property purchase, appraisal comes out as a very critical aspect of the entire process, as it determines if the money you are paying to purchase the property is actually the correct worth of that property.
Appraisals are carried out depending upon the condition of the property. There is often the chance of confusing inspection with appraisal, but these are two different approaches to the same property. While inspection is more physical oriented, as it examines the structure and strength of the house, the appraisal is very financial in nature, as it calculates the worth of the house taking into consideration the amenities provided as well as the defects that exist in the house. The inspectors’ report is sometimes referred to by the appraiser to calculate the final value, though this is not a rule. Appraisals come in three different ways. This can either be the sales comparison approach, the cost approach or the income approach. Sales comparison approach, as the term suggests, is a comparison of recent sales of similar properties in the same locality, and this is taken as a basic criterion, from which the final price is derived. The cost approach is more apt for newly constructed homes, as the value of the house in terms of construction is added to the market value of the land and a final price calculated. The income approach is used to value commercial and investment properties. This is because it is intended to directly reflect or model the expectations and behaviors of typical market participants and hence, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists to supply the necessary inputs and parameters for this approach.
Some important pieces of information that are part of any appraiser’s report are related to the property details like land measurements, evaluation of real estate market in the area, advantages and disadvantages of the property, availability of basic necessities like water, sewage lines or transport facilities as well as an estimate of average appreciation expected over a period of time.