What Are the Components of an Appraisal?

Buying a house can be the most significant investment most may ever encounter. Whether it's a primary residence, a second vacation property or a rental fixer upper, the purchase of real property is a complex transaction that requires multiple parties to make it all happen.

Practically all the participants are quite familiar. The most familiar entity in the exchange is the real estate agent. Then, the bank provides the money required to bankroll the deal. And ensuring all details of the sale are completed and that a clear title passes to the buyer from the seller is the title company.

Scott Spear MAI, SRA holds a Certified General Appraiser certification, the highest level of appraisal licensure, as well as dual MAI and SRA designations from the Appraisal Institute.  There are only a handful appraisers in the entire State of Montana with similar credentials.  All reports are defensibly prepared for future review, repurchase demand potential, or possible litigation.  

So, what party makes sure the value of the property is in line 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 406 Valuation, LLC will ensure, you as an interested party, are informed.

Inspecting the subject property

To determine an accurate status of the property, it's our responsibility to first perform a thorough viewing of the subject property. We must see features hands on, such as the number of units, office and retail area, bedrooms,  bathrooms, location, living areas, etc., to ensure they truly are present and are in the condition a typical person would expect them to be. The viewing often includes a sketch of the subject property, ensuring the square footage is proper and illustrating the layout of the property. 

Next, after the viewing, an appraiser uses up to three approaches to determine the value of real property: sales comparison approach, cost approach, and, in the case of an income producing property, an income approach.

Replacement Cost

Here, the appraiser analyzes information on local construction costs, the cost of labor and other factors to determine how much it would cost to construct a property comparable to the one being appraised. This figure usually sets the upper limit on what a property would sell for. It's also the least used predictor of value.

Sales Comparison

Appraisers become very familiar with the communities in which they appraise. They thoroughly understand the value of certain features to the property owners of that area. Then, the appraiser researches recent sales in the competitive market area and finds properties which are 'comparable' to the property in question. By assigning a dollar value to certain items such as square footage, quality, condition, room count, materials, or view lots (just to name a few), we add or subtract from each comparable sales price so that they more accurately match the features of subject property.

  • For example, if the comparable has an extra half bath that the subject does not, the appraiser may subtract the value of that half bath from the sales price of the comparable home.
  • In the case where the subject has something such as an extra half bath that a comparable doesn't have, the appraiser might add the value of that bath to the comparable property.

Once all necessary adjustments have been made, the appraiser reconciles the adjusted sales prices of all the comps and then derives an opinion of what the subject could sell for. This approach to value is usually given the most weight when an appraisal is for a real estate exchange.  When it comes to knowing the true value of real estate in Central and Western Montana, 406 Valuation, LLC is your local authority. 

Valuation Using the Income Approach

A third way of valuing real estate is sometimes applied when a neighborhood has a measurable number of income producing properties. In this case, the amount of income the real estate yields is factored in with income produced by neighboring properties to derive an estimate of the current subject property value.

The Bottom Line

Analyzing the data from all applicable approaches, the appraiser is then ready to stipulate an estimated market value for the property at hand. The estimate of value at the bottom of the appraisal report is not necessarily the final sales price even though it is likely the best indication of what a property is worth. Depending on the specific circumstances of the buyer or seller, their level of urgency or a buyer's desire for that exact property, the closing price of a home can always be driven up or down, but the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is estimated to be worth.  When it comes to knowing the true value of real estate in Central and Western Montana, 406 Valuation, LLC is your local authority and will allow you to make profitable real estate decisions.