What is a Real Estate Appraisal or Property Appraisal?

A real estate appraisal or property appraisal is the process of determining the value of a property, such as a single-family home, office, retail or industrial building. Appraisers consider factors such site and improvement attributes, real estate taxes, zoning as well as highest and best use in order to provide an accurate analysis and opinion of value for the subject property. The three approaches to value typically used by an appraiser are the Sales Comparison Approach, the Income Approach and the Cost Approach. Not all of the approaches to value are developed for each appraisal assignment.   

The Sales Comparison Approach draws heavily upon the principle of substitution. In essence, this principle states that a prudent purchaser will pay no more for any particular property than it would cost him to acquire an equally desirable alternate property.  This approach consists of the comparison of similar property, which has recently sold or is currently being offered for sale.  The appraiser adjusts the key attributes of the comparable sales to the subject property to determine a price per unit (most commonly price per square foot), which is applied to the subject to determine an indicated value.

The Income Capitalization Approach reflects the subject’s income-producing capabilities.  This approach is based on the assumption that value is created by the expectation of benefits to be derived in the future.  Specifically estimated is the amount an investor would be willing to pay to receive an income stream plus reversion value from a property over period of time.  The two common valuation techniques associated with the Income Capitalization Approach are direct capitalization and the discounted cash flow (DCF) analysis.

The Cost Approach estimates the value of the vacant site and adds to it the depreciated cost of the improvements.  The Cost Approach is based on the proposition that an informed purchaser would pay no more for the subject than the cost to acquire a similar site and construct similar improvements. 

The final step in the appraisal process is Reconciliation. The reconciliation of the various indications into a conclusion of value is based on an evaluation of the quantity and quality of available data in each approach and the applicability of each approach to the property type. The appraisers takes all of the previous analysis into consideration as well as the most likely user of the subject property, typically an investor or an owner user, and gives a weight to each of the approaches to value that were developed. One approach to value can be considered the most relevant, such as the sale comparison approach for a single-family home, and the remaining approaches can be given supporting weight or all of the approaches to value could be given equal weight. This is where the art in appraising can come in and is heavily reliant on how market participants and the most likely user of the subject would determine value in the subject’s specific market. 

How much does a real estate appraisal costs?

The fees can vary based on the property type, location and use of the report. For a typical single family home, appraisals can range from $450 to $850. For a custom or luxury home or ranch type property, the fees can be upwards of $2,500. A typical single tenant commercial property can range from $2,500 up to $6,000 depending on a number of factors. Multi tenant and more complex assignments are typically $3,500 and up depending on the complexity of the assignment.

The scope of work or the scope of the assignment is the primary factor that contributes to the cost of the appraisal report. The scope of work is the extent and manner that research is conducted, data is gathered and analysis is applied, which is based on the purpose of the appraisal and its intended use.

How long does a real estate appraisal take?

A single family appraisal can be completed in as little as 3 days, but this typically requires an additional rush fee. Most single family appraisals are completed in 5-7 business days. Commercial appraisal assignments are typically completed in 10-15 business days. More challenging or complex assignments can take upwards of 20 business days to complete.

Appraisal Vs. Broker Price Opinion?

It’s important to note that an appraisal is different from a broker price opinion, or BPO. A BPO — also known as a broker opinion of value, or BOV — is a written analysis of the estimated market value of a property, created by a real estate broker, rather than a licensed and certified appraiser.

A BPO is typically used for less formal purposes, such as pricing a property for listing or determining a reasonable offer price. Appraisals, on the other hand, are more formal evaluations that are typically required for lending and other financial purposes. They are more detailed and involve a more thorough analysis of the property, the market, and other factors.

Why are appraisals important?

Appraisals are typically requested by lenders, investors, and property owners. They are important because they can establish the value of a property for loan collateral, investment, or tax assessment purposes. They also can be helpful in settling disputes, risk management, and estate planning.

Beyond these uses, appraisals can also provide valuable information about a property’s condition, location, and potential for future development.

What are different types of Appraisal Reports?

Restricted Appraisal Report – This type of report is the least common in commercial real estate appraisal due to its minimal detail and content. It can only be relied upon by the client and is not suitable for most appraisal situations. The main advantage is the lower cost, as it takes less time to develop. However, it can only be used by the client and lacks enough detail for most appraisal uses. The report must include specific information such as the identity of the client, intended use of the appraisal, real estate details, value definition, appraisal methods, and more. It is important to clearly state any assumptions or conditions that may have affected the results.

Appraisal Report – This type of report can contain a moderate or extensive level of detail, depending on the intended use, scope of work, property type, and format (summary or comprehensive). Appraisal Reports can include one, two, or three approaches to value, depending on the property and use of the appraisal. The minimum reporting requirements of the Appraisal Report include stating the client and intended users, the intended use of the appraisal, information to identify the real estate, the type and definition of value, the effective date, the scope of work, analysis methods, reasoning, use of the real estate, highest and best use opinion, assumptions, and a signed certification.