Real Estate Evaluation - Introduction
Real Estate is now the preferred mode of investment and the yields increase if the investor is well informed, has a detailed plan with realistic goals and a good credit score. But the real estate market hinges on uncertain market conditions, changing legislation and many other factors that defy definition. This is the reason why real estate evaluation is an indispensable tool for an investor and as important as making a decision about purchasing property.
The importance of real estate evaluation is felt by diverse socio-economic agents, such as real estate buyers and sellers, governments and municipal authorities for legislation and tax purposes, financial institutions for lending reasons, and real estate brokerage businesses for marketing purposes. All these components require real estate evaluation to obtain a realistic description of the property market to make timely and profitable decisions.
A real estate evaluation is an opinion or estimate of the value of a property. Real estate evaluators or appraisers are certified and licensed professionals affiliated to an accredited organization. The Appraisal Institute and The National Society of Real Estate Appraisal subject their members to rigorous standards and certifications that are based on continuing education, ethical standards and enforcement procedures.
Real Estate Evaluation - Methods
A Real Estate Evaluation tries to determine the 'fair market' value of a piece of real estate. Evaluation of a property is done by three methods:
1) The Cost Approach: This method determines the replacement cost of the land and the built-up structure at the present rates, less depreciation.
2) The Income Approach: This method determines the income potential of the property.
3) The Price Method: This method is generally used and accepted. This method compares the selling price of recently sold similar properties in the neighborhood.
When is a Real Estate Evaluation Necessary?
When you apply for a new mortgage loan, the lender orders a property evaluation to determine the contract price. Evaluations are also undertaken by individuals to determine a reasonable offering price in case of a sale, to determine the property value for estate tax purposes, value of land versus the built up structure and for insurance and tax purposes.
Tips on Real Estate Evaluation
1) Evaluation determines the value of the property or its related overall real property value. It should not be mistaken for a home inspection.
2) It is in your best interest to use a licensed and certified real estate evaluator preferably someone who is knowledgeable about the area in which the property is situated. An evaluator's fee is about $150-$300 which is money well spent.
3) A certified appraiser apart from evaluating your property can also help in eliminating private insurance, help in estate planning, analyzing the necessity of proposed improvements, and insurance valuations. He can tell you how much the value of a home would increase by adding another bathroom or remodeling a kitchen.
4) Home improvements should be undertaken with caution. Neutral decorations like carpeting, painting, wallpaper can add to the look of a house and remodeling the kitchen and bathrooms can add to the value of a home, but major improvements should be done by keeping in mind similar other properties in the area.
5) Get a real estate evaluation when you need it, most evaluations are considered outdated after six months.
6) The relationship between you and the appraiser is governed by confidentiality and fiduciary responsibility. So your appraiser cannot discuss your property in general.
7) Insist on a complete appraisal and not a drive-by appraisal. A complete appraisal includes the interior of the house, its condition and layout, noting the number of bedrooms and bathrooms, amenities and condition of the kitchen, and also the outer area of the house. The age of the house, its overall condition is also taken into consideration. A complete evaluation helps the appraiser in evaluating cost and comparison with other similar properties.
8) Real estate evaluations consider only permanent fixtures and real property.
9) An unbiased evaluation by an independent licensed appraiser can be an excellent negotiating tool.
10) Do not go in for an online appraisal. An online appraisal is used only to determine an asking price, mortgage lenders do not accept an online appraisal.
11) Certain documents are necessary to obtain an accurate evaluation, keep the following documents ready:
a) the plan of the plot or land survey
b) The title document,
c) A home inspection report,
d) Documentation of recent improvements made and their costs
12) A comparative market analysis should not be confused with an evaluation report.
13) An appraisal or evaluation report will include the address of the subject property, description of the neighborhood including variables like schools, the fire department, shopping conveniences etc. It also includes market factors like property trends and a description of the lot. The report contains a listing of the features and distinguishing characteristics of the house, the condition of the façade of the house, the foundation etc. The report also covers the number of rooms, fixtures and furnishings and their condition, utility systems like heating and electricity and amenities in the kitchen. It also describes the attic, garage, pools or sheds if applicable. The report further includes the selling cost of three similar properties in the neighborhood. Finally an estimate of the value of the home.
When Carla and Jose Matthews decided to sell their home of 10-yrs and move near to their children, neighbors and sundry advised them that the property would fetch them about $80,000. An online appraisal pegged their property at $75,000. Since the amount was about the same as they were expecting, they decided to sell their property. Their banker advised them to utilize the services of a qualified home appraiser. Loath to spend more money, they nevertheless heeded the advice and approached an independent real estate evaluator. It was only after the appraiser personally visited the area and their property, that the Matthews came to know that property prices in their area were perceptibly increasing. The appraiser advised them to go in for a overall painting job, repair the tiles in the front yard, paint the railings on the porch and remove all junk piled around the house. He advised them to change the water pipes that leaked water, which then puddled around the foundation. Putting in new plumbing pipes, tey also remodeled their kitchen and renovated the bathrooms.
The appraiser's fee and improvement costs the Matthews $14,000. But this expense upped the asking price of their home to $130,000.
Armed with the appraiser's report the Matthews approached a brokerage firm and within a short time they completed the sale of their house for $120,000, which was way above the amount they would have got if they had not got the property evaluated.