Understanding Real Estate: What is an Appraisal?

A real estate appraisal is a written professional opinion on the market value of real property.  That is, the home you are purchasing or selling.  The appraiser must be a third party, impartial to the transaction and licensed in the state of Michigan.

The value of the property is based upon a market analysis of recently sold properties (within the last 6 months) within close proximity (no more than 1 mile away) and in similar condition. The appraisal report states the appraiser's professional opinion of the property's value based on their knowledge and evaluation of the property.  The value is found 3 different ways.  

• The Cost Approach is an estimate of what it would cost to replace or reproduce the improvements as of the date of the appraisal given deductions like physical deterioration.  This number is added to the land value as stated in county records to determine the value of the property.  
• The Comparison Approach takes into consideration properties of similar size, quality and location that have recently sold.  Variations between the properties are factored into the value by adding or subtracting amounts to adjust for things like bathrooms, lot size, even the view from the living room window.  After all things have been calculated, value is stated.  
• The Income Approach is typically used for commercial properties and not relevant to residential purchases.  This approach estimates the value of the property based on the net income the property produces.  

Photo courtesy of Solar Knowledge

If you are using a bank to purchase a home, an appraisal will be required.  The cost is normally included in your closing costs.  The appraiser will also make sure the home is up to code for the loan type you are using.