Hey there. This is Seth from retipster.com.
And in this video, we're going to talk about what an appraisal is.
So in the real estate world,
an appraisal is an unbiased assessment
of what a property's fair market value is.
Put together by a licensed professional known as an appraiser.
An appraisal plays a very important part in the real estate transaction,
especially when financing is involved.
Lenders rely on the appraisal report
to understand what the value of their collateral is,
which also helps educate them on
how high their loan amount should be.
So they don't exceed their loan to value ratio,
which essentially helps lenders make sure
they're not overextending the loan amount
and lending too much based on how much the property is actually worth.
Insurance companies also rely on the appraisal
to determine the proper amount of insurance coverage,
even local taxing authorities can use the appraisal
to help determine the proper amount of property taxes each year.
Real estate investors also need to understand
what a property's fair market value is.
And an appraisal is one helpful way though, not the only way to determine
what that number most likely is.
Now part of what makes real estate such an interesting type of investment
is that fair market value is kind of a subjective number,
depending on who you ask and what data you look at
a property may be worth more in one person's eyes as opposed to another.
So as you might imagine, there's more than one way to determine
what the fair market value of a property actually is.
And professional appraisers typically use
one or more of three different approaches to do this.
And it kind of depends on the property type,
the property use and a number of other factors.
So the first approach that is commonly used
to figure out this number is called
the sales comparison approach.
And this approach determines the value of a property
by comparing it with other similar properties
in the near vicinity that have sold recently,
usually within the past 6 to 12 months,
depending on the situation.
And if there just aren't that many comparables available,
it doesn't necessarily have to fall within that precise timeline.
With the sales comparison approach,
there's a fair amount of subjectivity at work
because no two properties are exactly alike in every possible way.
So the appraiser has to use a bit of discernment
in deciding which properties they're going to use as proper comparables
for the property they're trying to evaluate
and then make some adjustment to the property value
based on location, age, the size, condition
terms and conditions of the sales.
If the property was discounted because it was sold
between family members or sold under duress
or any upgrades and enhancements that were made to the property,
say things like landscaping, a new kitchen,
new windows, solar panels, things like that.
And the list goes on.
There's all kinds of variations and differences that
need to be accounted for when you're using comparables like this.
The sales comparison approach usually requires
at least three to four similar comparables
or comps for short,
for the most accurate appraisal.
And usually extra weight is given to properties
that require the fewest adjustments
and are most similar to the property being evaluated.
The sales comparison is most commonly used
in a residential real estate for single family homes.
Now the next approach is called
the income approach
or the income capitalization approach.
And this is used pretty frequently in
commercial real estate appraisals
because it's based on the properties historical income
and rate of return that it's made for the investor that owns it.
With the income approach, the properties value is essentially tied
to the amount of income it generates.
So generally speaking,
the higher the income, the higher the value of the property.
And then the third method that can be used to value a property
is called the cost approach.
And appraisers will typically use this method
to appraise properties that have been improved
by the construction or development of one or more buildings.
With the cost approach,
the value of the land and building minus depreciation
are estimated separately
and then added together to arrive at the appraised value.
And the biggest assumption behind the cost approach
is that the buyer is not going to pay more for the property
than it would cost to rebuild it from scratch.
Insurance companies often use the cost approach
to determine the amount of replacement coverage
that is needed for a property.
I hope you enjoyed this video.
And if you did be sure to give it a like
and hit the subscribe button.
And don't forget to check out the full article all about appraisals
over at retipster.com
The link is beneath this video.
And by the way, have you seen this other video we have
all about house hacking?
You should totally check it out.
We'll see you over there.