What is a Real Estate Appraisal?

Published by Thomas Herold in Real Estate, Investments

'Real Estate Appraisal' is explained in detail and with examples in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Real estate appraisal refers to the procedure where an expert real estate appraiser creates a professional opinion on the value of a house, land, or other real property. It is also called land valuation and property valuation. The value the appraiser comes up with is typically the market value for the house or land in question. Many times real estate purchases and sales need an expert to perform an appraisal since they do not otherwise happen very often. Besides this, each property is totally unique, as is there location and condition.

Properties can not change their location, however they may benefit from improvements and upgrades. Real estate appraisal takes such modifications into consideration when formulating a value. The resulting appraisal report is what they produce in the end. Such reports prove to be the underlying basis for mortgage and property loans, some forms of taxes, divorce and estate settlements, and other important legal and financial transactions. Appraisal reports can even be (and often are) utilized to set the property’s ultimate sale price.

The majority of countries mandate that their professionals who perform real estate appraisals must be certified, licensed, or both. These appraisers have a number of titles in different nations and jurisdictions, including “land valuers” and “property valuers.” British English calls them “valuation surveyors.” Real estate appraisals within the U.S. report on Uniform Residential Appraisal Reports. For those appraisals of commercial properties such as land or income producing ones, Certified General Appraisers complete and report these in a running narrative version.

Real estate appraisals can produce a few different kinds of value. The most typical of these are the market value, investment value, use value, insurable value, and liquidation value. Market value is also called fair value or open market value. It is the approximate amount at which the real estate should change hands between willing sellers and buyers on a given valuation date in an official and legally binding transaction.

Investment value is the value of the property in question for a certain investor. This could be or might not be greater than the market value for the house, land, or commercial property. It is the difference between the market value and investment value that offers an incentive for people to buy or sell their property in the first place.

Use value refers to the NPV or net present value for cash flow of the asset. This is the revenue it creates from a particular use for the specific owner. It could be higher or lower than the given home or property’s market value.

Insurable value will be the one that relates to the insurance policy coverage on a given piece of real property such as a house or commercial office building. This will typically not include any site value for the land and/or location. It is also a form of replacement cost value.

Liquidation value relates to the price of a property typically when it is sold during bankruptcy proceedings. It might be determined as either a part of an orderly liquidation or a forced liquidation. The price will reflect the fact that the seller is made to sell the property in a shorter than typical market time frame. This means that the liquidation value on a given house, building, or piece of land is commonly lower than the market value. At times it can be substantially lower because of the desperate circumstances which warrant a near-immediate sale. This gives rise to the phrase a “fire sale” of property or assets.

It is worth noting that there are often significant differences in the relevant market value and purchase price. Sometimes buyers are able to obtain the property for less than the market value. This could be because of a personal connection between the buyer and seller or other mitigating factors. When the price given for a property is not the fair market value as shown by the real estate appraisal, then this value is referred to as the market price.

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The term 'Real Estate Appraisal' is included in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.