What Is an Appraisal?

Their home's purchase can be the most significant financial decision most people could ever encounter. It doesn't matter if where you raise your family, a second vacation home or one of many rentals, the purchase of real property is an involved financial transaction that requires multiple people working in concert to pull it all off.

Practically all the people involved are quite familiar. The most recognizable entity in the transaction is the real estate agent. Then, the mortgage company provides the financial capital needed to bankroll the deal. And ensuring all requirements of the exchange are completed and that the title is clear to pass from the seller to the buyer is the title company.

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So, who's responsible for making sure the property is worth the amount being paid? This is where the appraiser comes in. We provide an unbiased opinion of what a buyer might 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 Midwest Appraisal Company, Inc. will ensure, you as an interested party, are informed.

The inspection is where an appraisal begins

To ascertain the true status of the property, it's our responsibility to first complete a thorough inspection. We must actually see features, such as the number of bedrooms and bathrooms, the location, amenities, etc., to ensure they indeed are present and are in the condition a typical buyer would expect them to be. To make sure the stated square footage is accurate and describe the layout of the house, the inspection often requires creating a sketch of the floorplan. Most importantly, we identify any obvious amenities - or defects - that would have an impact on the value of the property.

Once the site has been inspected, we use two or three approaches to determining the value of the property: a sales comparison, a replacement cost calculation, and an income approach when rental properties are prevalent.

Cost Approach

This is where the appraiser gathers information on local construction costs, the cost of labor and other elements to ascertain how much it would cost to replace the property being appraised. This value usually sets the upper limit on what a property would sell for. It's also the least used predictor of value.

Analyzing Comparable Sales

Appraisers are intimately familiar with the subdivisions in which they appraise. They thoroughly understand the value of specific features to the homeowners of that area. Then, the appraiser researches recent transactions in close proximity to the subject and finds properties which are 'comparable' to the subject in question. By assigning a dollar value to certain items such as fireplaces, room layout, appliance upgrades, additional bathrooms or bedrooms, or quality of construction, we adjust the comparable properties so that they are more accurately in line with the features of subject property.

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

A valid estimate of what the subject might sell for can only be determined once all differences between the comps and the subject have been evaluated. At Midwest Appraisal Company, Inc., we are experts in knowing the value of real estate features in Chicago and Cook County neighborhoods. This approach to value is commonly awarded the most importance when an appraisal is for a home purchase.

Valuation Using the Income Approach

A third method of valuing a house is sometimes used when a neighborhood has a reasonable number of rental properties. In this scenario, the amount of income the property yields is factored in with other rents in the area for comparable properties to derive the current value.

Reconciliation

Combining information from all approaches, the appraiser is then ready to document an estimated market value for the subject property. The estimate of value on the appraisal report is not always 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 the final price 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 they could recover in case they had to sell the property again. The bottom line is, an appraiser from Midwest Appraisal Company, Inc. will help you get the most fair and balanced property value, so you can make wise real estate decisions.