Appraisals- What's In It For Me?
It's a relatively well-established fact
that appraisals are requirements for most transactions involving
a real property. It is also obvious that those who require
them are generally the ones to benefit from the information.
But
after all, as the owner, it is you
who ultimately pays the appraisal fee. So what do you
get for your money?
First, it is important to know that in
the Bahamas, as in most other countries, the property owner
does
not automatically
have
a right to the
appraisal. The entity that orders
and pays for the appraisal owns the right to the information.
An example of this is the situation for an appraisal ordered
to support a mortgage application. However, you will almost
always be able to get a copy of the appraisal in the name
of good customer
relations.
This is well worth the exercise for the
property owner. The information contained in the
appraisal will help
you, and other parties - insurance, your estate lawyer, as
examples - to arrive at what
should be considered the objective value of your property.
Most valuable to the owner therefore, is
to understand how the appraisal has been formed. Then you
can use the information in other important decisions.
The professional appraisal method is what
allows unrelated parties to be comfortable with the valuation.
Seemingly complicated, the appraisal contains a wealth of
information due to the way the figures have been derived.
In an appraisal, there are two main methods
used to arrive at an evaluation, the "Cost Approach" and
the "Sales Comparison Analysis".
Easiest to understand is the Cost
Approach. Think of this method as a calculation of what it would cost
to build the home today. Another way to relate to this is
to think of the Cost Approach as a thorough calculation of
replacement costs.
In the Cost Approach, the appraiser measures
the square footage of the home, then multiplies it by the
cost-per-square foot to get the base Dwelling cost. Then,
improvements are added - garage, landscaping, fencing, pool,
and other
improvements. Depreciation is factored in, and
the value of the land is added.
Calculated together, these constitute the "Value
by Cost Approach."
The Sales Comparison Analysis arrives at
the evaluation of your property in another manner. Here the
appraiser looks at
the marketplace. Three to four recent sales
not more than a year old are identified in your area, and
are fully analyzed.
As the homes will be dissimilar in size,
sold price and type, the appraiser will make adjustments
that begin to rationalize the difference in prices.
Factors
of this calculation include adjustments for age differences,
and accountings for differences in features
such as lot size. If one home had
a larger pool or one less garage bay, or more landscaping,
these factors form the basis of adjustment for each home
sold.
Once the component values in the sold homes
have been fully studied, the appraiser then arrives at your
home's value by the Sales Comparison
Approach.
A caveat: the Value by
Sales Comparison approach is not used as much in the Bahamas
due to the lack of reliable sales data. There are certain
market segments that offer a uniform product that do lend
themselves to this approach. Appraisals in Sandy port, Treasure
Cove (both in New Providence), and other condominium complexes
for example,
are able to have a proper Value by Sales Comparison applied.
There is also a third method rapidly gaining
prominence, the Income Capitalization
Approach.
This value derivation is also useful in evaluating
condos for mortgages since the bank can see what the income
would be if they were to foreclose. HGChristie Appraisals
is a leader in implementing this innovative method, and we
will be thoroughly dealing with this subject
in an upcoming article.
As you now look at who is interested in
the appraisal, you begin to see the value you receive in
each of the two classic methods. The Cost Approach number
is not used by most lenders as they support a case for a
maximum
loan amount, preferring the Sales Comparison method.
However, your insurance agent is more interested
in the Cost Approach method. After all, if some disaster
occurs ( and we certainly hope it doesn't) you will need
to be covered for the cost to rebuild, not just the loan
amount.
There is another strong value delivered
to you in the duality of the appraisal method. Because virtually
all lenders will require insurance to an amount equivalent
to their loan balance, it would be relatively easy to think
that is all you need. However, a good look at the Cost Approach
will show you the amount of insurance you need to be fully
protected.
Now that you know how an appraisal is done,
take the time to study your appraisal. Although
the job of the appraisal is to
deliver an informed estimate of the Fair Market Value of
your property, there is much more value
in the document to you, the owner, by understanding
the components
of the appraisal.
By understanding the
parts that make up the "final" number, you will certainly
receive what you paid for,
and more.
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