An Overview of Appraisals

Purchasing real property is an involved financial transaction that requires multiple people working in concert to make it all happen.

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Most people are familiar with the parties taking part in the transaction. The most known person in the exchange is the real estate broker. Next, the bank provides the capital to finance the deal. After requirements of the sale are completed and that a clear title passes to the buyer from the seller is the title company.

So what party makes sure the value of the real estate is consistent with the purchase price?   In comes the appraiser.   We provide an unbiased estimate of what a buyer could expect to pay - or a seller receive - for a parcel of real estate, where both buyer and seller are informed parties. A professional Colorado licensed appraiser from Bearing Commercial Appraisal will ensure you as an interested party are informed.

Information gathering is where an appraisal starts

To determine the true status of the property, it's our responsibility to first complete a thorough investigation of the property and the surrounding area. We must see and evaluate characteristics of the property, such as Location, Quality, Condition, Size, Traffic Count, Use, Income Potential, etc. The property site and visit inspection often includes reviewing sketch, blueprints and ensuring the square footage reflects the layout of the property. Most importantly, we look for any obvious features - or defects - that would have an impact on the value of the buildings. 

Back at the office, we use a combination of three value approaches when determining the value of the property: a Sales Comparison Analysis, Replacement Cost Estimate, and Income Approach. Not all approaches are used in every report.

Cost Approach

This is where the appraiser gathers information on local construction costs, labor rates and other elements to ascertain how much it would cost to build a property comparable to the one being appraised. The age/quality/condition is considered and the remaining usable life of the property is estimated. The depreciated improvement cost is added to the Land Value to estimate the final indication.  

Analyzing Comparable Sales

Appraisers can tell you a lot about the submarkets in which they work. We thoroughly understand the value of particular features to the properties of that area. Then, the appraiser researches recent sales in the neighborhood and finds properties which are 'comparable' to the property being appraised. The comparable properties are then adjusted to so that the values more accurately reflect the features of subject property.

  • For example, if the comparable property has a storage mezzanine and the subject doesn't, the appraiser may deduct the value of a mezzanine from the sales price of the comparable warehouse.
  • However, if the subject has an extra large fenced storage yard and the comparable does not, the appraiser might add an amount to the comparable property.
This approach to value is usually awarded the most consideration when an appraisal is for a real estate purchase and the buyer is an owner-user.

Valuation Using the Income Approach

A third way of valuing a property is typically used with the property is leased and derives an income. In this scenario, the amount of income the real estate yields is taken into consideration along with other rents in the area and expected vacancy and expense levels are deducted to estimate a net income (NOI). The income is divided by a capitalization rate to estimate the value. This approach is most applicable to investment properties. 

Putting It All Together

Analyzing the data from all applicable approaches, the appraiser is then ready to document an estimated market value for the property at hand. The estimate of value on the appraisal report is not always what's being paid for the property even though it is one indication of what a property could sell for in an open market. There are always mitigating factors such as seller motivation, urgency or 'bidding wars' that may adjust the final price up or down. Regardless, the appraised value is often employed as a guideline for lenders who don't want to loan a buyer more money than they could recover in the event they had to put the property on the market again. It all comes down to this: An appraiser from Bearing Commercial Appraisal will guarantee you attain the most fair and balanced property value, so you can make profitable real estate decisions.