Understanding Appraisals

Buying real estate is the largest financial decision some of us might ever consider. It doesn't matter if a primary residence, a second vacation property or one of many rentals, purchasing real property is a detailed financial transaction that requires multiple parties to make it all happen.

The majority of the participants are quite familiar. The most recognizable person in the exchange is the real estate agent. Then, the lender provides the financial capital needed to bankroll the deal. And ensuring all areas of the exchange are completed and that a clear title transfers to the buyer from the seller 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 you meet the appraiser. 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 Pencader Associates will ensure, you as an interested party, are informed.

Appraisals start with the inspection

To determine the true status of the property, it's our responsibility to first perform a thorough inspection. We must see aspects of the property first hand, such as the number of bedrooms and bathrooms, the location, living areas, etc, to ensure they indeed exist and are in the condition a reasonable person would expect them to be. To ensure the stated square footage is accurate and illustrate the layout of the home, the inspection often includes creating a sketch of the floorplan. Most importantly, the appraiser looks for any obvious amenities - or defects - that would affect the value of the house.

Following the inspection, an appraiser uses two or three approaches to determining the value of real property: a paired sales analysis, a replacement cost calculation, and an income approach when rental properties are prevalent.

Replacement Cost

This is where we use information on local building costs, labor rates and other elements to calculate how much it would cost to replace the property being appraised. This figure commonly sets the maximum on what a property would sell for. The cost approach is also the least used method.

Analyzing Comparable Sales

Appraisers are intimately familiar with the subdivisions in which they work. They thoroughly understand the value of particular features to the homeowners of that area. Then, the appraiser researches recent transactions in the area and finds properties which are 'comparable' to the real estate being appraised. By assigning a dollar value to certain items such as upgraded appliances, additional bathrooms, additional living area, quality of construction, lot size, we add or subtract from each comparable's sales price so that they more accurately match the features of subject property.

  • For example, if the comparable has an extra half bath that the subject does not, the appraiser may subtract the value of that half bath 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 a certain amount to the comparable property.

After all differences have been accounted for, the appraiser reconciles the adjusted sales prices of all the comps and then derives an opinion of what the subject could sell for. At Pencader Associates, we are an authority when it comes to knowing the value of real estate features in Bear and New Castle County neighborhoods. This approach to value is most often awarded the most weight when an appraisal is for a real estate purchase.

Valuation Using the Income Approach

In the case of income producing properties - rental houses for example - we may use an additional method of valuing a house. In this scenario, the amount of income the real estate produces is factored in with other rents in the area for comparable properties to give an indicator of the current value.

Putting It All Together

Examining the data from all applicable approaches, the appraiser is then ready to stipulate an estimated market value for the property in question. It is important to note that while this amount is probably the most accurate indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as the seller's desire to get out of the property, urgency or 'bidding wars' that may adjust an offer or listing price up or down. Regardless, the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than they could get back in the event they had to sell the property again. The bottom line is, an appraiser from Pencader Associates will guarantee you discover the most accurate property value, so you can make the most informed real estate decisions.