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Your home is most likely your largest, single investment.  Whether its your primary residence, a second or vacation home or an investment opportunity, the purchase of your  home or investment property is a complex financial transaction that requires the coordination of multiple parties all working together lawfully for your best interest.

Most of the people you will meet are very familiar. The Realtor is the most common face of the transaction. The mortgage company you select intends to provide the mortgage money needed to fund that part of your purchase transaction situated beyond your down-payment. The title company or family attorney ensures that all aspects of the transaction are completed and that clear (marketable or insurable) title to the property passes from the seller to you the buyer.

So who makes sure the value of your intended property is in line with the purchase price being paid? 

This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller might expect to receive - for the home under contract for sale and purchase, wherein both the buyer and seller are informed parties and each is acting in their own best interest.

To be an informed participant in any real estate, most people turn to a state certified, general real estate appraiser with a designation from the Appraisal Institute to provide them with the most accurate estimate of the true value of their property.  Michael E. Armbruster, SRPA is both state certified and a senior member of the Appraisal Institute.

The Inspection

So what goes into a real estate appraisal? It all starts with the inspection. An appraiser needs to inspect the home being appraised to ascertain the attributes of the property. The appraiser must see, for himself, what the intended home has to offer, i.e. gross and net building area, number of bedrooms, bathrooms, size and quality of the living/family room, kitchen, the garage, pool, patio, porch, the location of same within the neighborhood at large to ensure that they really exist and to determine how they will compare with alternative or substitute housing available in the market.

The inspection typically includes measurement and a sketch of the home, ensuring the proper square footage and room count.  Most importantly, the appraiser looks for any obvious features - or defects - that would affect the market value of the house.

Once the site and home has been inspected, the appraiser uses two or three approaches to value in estimating the market value of the home, i.e. a cost approach, direct sales comparison and when appropriate an income approach.

Cost Approach

The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a similar home to the one being appraised on a lot of equal economic utility. 

Sales Comparison

Appraisers get to know the neighborhoods in which they work. They do not travel across the state to appraise property in neighborhoods that are unfamiliar to them.

Appraisers understand the value of certain features about a neighborhood and homes located therein to the residents of the area. They know the availability of public utilities, traffic patterns, school districts, busy throughways; and they use this information to determine which attributes of same will make a difference in the value being sought.

The appraiser researches recent home sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised, i.e. comparable in size, effective age and economic utility. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Obtaining pared sales data and using such knowledge of the value of certain items such as square footage, bedroom/bathroom count, swimming pool and the like, the appraiser adjusts the comparable properties to more accurately portray the attributes of the subject home.

Gross Income Multiplier

Gross income multipliers (GIM) compare the amount of rent a home can obtain with the sale price paid for same or an equally good substitute home.  Once ascertained, monthly rental differences among comparable quality homes due to the existence or absence of a feature such as a swimming pool or additional bedroom and the like when multiplied by the GIM form the economic basis for a needed adjustment within one or both of the approach to value previously described above.

Additionally, in the case of income producing properties - rental houses for example - the appraiser may use this third approach to valuing the property. In this case, the amount of income the property can produce at market rates when multiplied by the GIM is used to arrive at the current or present value of those revenues over the foreseeable future.

Reconciliation

Combining information from all approaches utilized, the appraiser is then ready to provide an estimate of market value as of the date of the appraisal.  It is important to note that while this amount is probably the best indication of what a property is worth, it may or may not be equivalent to the contract sales price.