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The purchase of a home is the largest investment that most people make.  No matter if it's a residence, a second home or a purchase simply for an investment, the purchase of real property is a rather complicated financial transaction that requires several different parties to complete.

Most of the parties involved are known by the purchaser.  The most well-known is the Realtor.  The mortgage company assists the finances necessary to fund the purchase while the title company's job is to ensure that the transaction is completed and that the title of the property is clear and passes correctly from the seller to the buyer.

Here is the role of the appraiser:  We make sure that the value of the property is correctly in line with the amount being paid.  This is an important part of the process since such an important transaction should not proceed unless the value is accurately known.

At Colorado Appraisals, we give an unbiased and accurate estimate of what the buyer of a property should expect to pay, or that a seller should expect to receive.  Both the buyer and seller are informed of the valuation information.  To be truly informed for a completely secure transaction, a professional appraiser far outweighs an online automatic service that "spits out" a value without having viewed the home or evaluating important information regarding the property.  Put simply, a simple price comparison is inadequate for the needs of the buyer or the seller.

The Inspection:

What exactly goes into a real estate appraisal?  The whole process begins with the inspection.  Our job is to inspect the property to evaluate the true status of the property.  We actually see various features of the home such as the number of bedrooms, bathrooms, the location of the property, etc., and ensure that they really do exist and are in the state that a buyer would expect them to be in. 

The inspection most often includes a sketch of the property to ensure the proper square footage and to convey the layout of the property.  We look for defective features that would affect the value of the home, as well as points that will actually accent the value.

Once we've inspected the site, we use two or three approaches the accurately determine the value of the property - cost, comparison of sales and with a rental property we use an income approach.

The Cost Approach

The cost approach may be the simplest to understand.  We use information about local costs of building, rates of labor and other factors to assess how much it would actually cost to build a property like the one being valued.  This value shows an "upper limit" on what the property should be priced at.  This can be beneficial to understand since - Why would someone want to pay more for an existing property when they may be able to spend less to build a new home?  Other factors such as location and amenities are not shown in the cost approach - more on that below.

The Sales Comparison

We rely on the sales comparisons to value types of items such as location and amenities.  We get to know the neighborhood of the property and understand the value of various features available to the residents of that area.  We know traffic patterns, school zones, busy throughways and we use this type of data to evaluate which attributes of a property will make a difference to it's final value.  We then research recent sales in the area of the property and locate similar ("comparable) properties to the site being appraised.  The sales prices of these homes or properties are used as the foundation to begin the sales comparison approach.

Using the information of attributes to the home such as square footage, extra bathrooms, type of floors (hardwood/carpet), fireplaces, view lots and other items we then adjust the comparable properties to more specifically ascertain the subject property.  An example of this - if the property being compared has a fireplace but the subject home does not we may deduct the value of that fireplace from the sales price of the comparable home.  If the subject home has an added half-bath but the comparable does not, we may add that amount to the comparable property.

With income properties (such as rental homes) we may use an additional approach to estimating a value of the property.  The amount of income the property products is relevant and is then used as data to arrive at the value of the future revenues estimated for the property. 

Reconciliation

Taking into account the information from all of the approaches used (reconciling all information available) we are then prepared to give an estimated market value for the subject property.  This amount is likely the best indication of what a home or property is worth - however it is important to know that this may not be the final sales price.  Other factors may be involved such as "seller motivation", "bidding wars" or some urgency for either party of the transaction.  These items may cause an adjustment of the price higher or lower.  However the value that we give is often used as a guide to the lender who wants to make sure to loan the buyer more money than what the property is worth.