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Basic Appraisal Concepts

The reason for an appraisal is to aid someone in making a decision. This could refer to: a mortgage lender, a potential home buyer or seller, an accountant who is trying to settle an estate, a homeowner disputing their property taxes, etc. An appraisal is an estimate of market value based upon the opinion of the appraiser.

An appraisal is a supportable and defensible estimate of value based upon the opinion of the appraiser. It's not a prediction which is what a crystal ball is for, and it's not a projection which is a mathematical forecast.

The value of real estate is indeterminable due to the imperfect market. This means that real estate isn't like stocks and bonds where you can just look up its value in the newspaper. An appraisal is a supportable and defensible estimate of value based upon the opinion of the appraiser. It is a forecast. It's not a prediction (which is what a crystal ball is for), and it's not a projection which is a mathematical forecast. The difference between a forecast, a prediction and a projection:

  • Forecasting is done with the best available information and facts that you have with reasonable conclusions to estimate the future.

  • Predictions are less precise statements than forecasts. But a prediction has some basis (as opposed to something a fortune teller would tell you about the future).

  • Projections are based on the past and don't allow for contingencies to estimate the future. It's similar to statistics that use projections of figures.

A forecast is an estimate. Appraisers forecast not predict because a forecast is based on whatever data is available and correct at the time of the report. Your appraised property value estimate is a forecast because it's the value in future benefits. The value of a property is the present value of future benefits from the ownership of that real estate.

The appraiser measures the value; he doesn't determine the value. The market determines value.

The appraiser measures he value of real estate; he doesn't determine the value. The market determines the value of real estate! This means that potential buyers decide the value based upon recent, similar sales of comparable properties in the area. All the appraiser is trying to do is measure what the potential buyers are willing to pay for the real estate. Value is always measured through the eyes and aspects of the buyers, and not the sellers. People, not a property, make value and determine the sale prices of real estate.

The Use of a property leads to its Productivity, which leads to it's Value. For example, if you have a two-family house, it will generally be worth more money than a one family house. The reason for this is that there is additional rental income from the second apartment. However, in some areas a single family house is worth more than a two-family house. That's because the single family fits-in with the other houses in the neighborhood, and there are no other two-family houses around. This is more common in a higher priced single-family area.

Another example is in the case of a legal rooming house with many small apartments. As a rooming house the structure brings in a substantial amount of income. However, if you converted that rooming house to a one family dwelling, then you eliminate all the extra rental income. By doing this, it will generally reduce the property's market value.

43,560 square feet equals one acre. There are 640 acres in one square mile.

DON'T FORGET THESE FIGURES!!! Often you will need to know these figures to make calculations for an appraisal. You may come across the terminology of "chains" concerning an acre. Just remember that one chain is equal to 66 feet. An acre is equal to one chain times ten chains or:

66 feet x 660 feet = 43,560 square feet.

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