A real estate appraisal is used to determine the market value of a property and is necessary for a variety of reasons. The Appraisal Institute defines market value as:
“The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (a) buyer and seller are typically motivated: (b) both parties are well informed or well advised, and each acting in what he considers his own best interest; (c) a reasonable time is allowed for exposure in the open market; (d) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (e) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
The value of a property is the future benefit that the owner of the property can expect to receive from rental or other income. In determining what future benefit an owner could receive from a property, the current use of the property is considered as well as all other uses that might be possible in the foreseeable future. For example, cropland could be usable for a residential development in several years, but later might be usable as commercial property.
Knowing the value of property is important to the decision-making process for all buyers, sellers and users of real estate, so valuation is an integral part of all real estate activity. It is needed for personal planning, as well as zoning, community planning and calculating taxes.
If the property is held for investment purposes, an additional question would be what the value of the property might be in the future. One can never know for sure, but the closest that anyone can approximate what that value might be will be by an appraisal from a professional appraiser. This trained specialist can give a good accurate estimate of a property’s value.
When Is An Appraisal Needed?
When we refer to market value one needs to remember that it is not necessarily the same as market price. Market price represents the actual dollar amount put on a property by a buyer and a seller at the time of a negotiated transaction. This might be higher or lower than the value an appraiser might place on the property. This difference might be due to differences of opinion, or it may be that the property, to this particular buyer or seller, has a greater or lesser value because of some special consideration, such as financing that the buyer can obtain or the need of a seller to raise cash quickly.
While the owner or a prospective buyer can order an appraisal at any time, there are times when it is almost always required. Some examples of this would be: