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What is an Appraisal?
An appraisal is an unbiased assessment of a property's value, prepared by a professional appraiser. Appraisals can also be prepared to estimate the true value of a business, equipment, and other asset classes.

Understanding Real Estate Appraisals
An appraisal plays a very important role in every real estate transaction.

Real estate investors, lenders, tax authorities, and insurance companies all rely on an accurate property valuation to do their jobs effectively. For instance:

- Lenders rely on the appraised value to determine their loan amounts and Loan-to-Value Ratio.
- Insurance companies use the appraised value to determine insurance coverage and premiums.
- Tax authorities rely on accurate property valuations to determine annual property taxes.
- Real estate investors need to understand a property’s value to make an appropriate offer, make improvements and eventually make a profit.

An appraisal report is always accompanied by supporting data to support the validity of the valuation.

Property Valuation Basics
In economic terms, the property value is defined as the worth of future benefits to the property owner.

With most consumer goods, the benefits of ownership are realized virtually immediately. However, real estate benefits are realized over a long period.

For this reason, a real estate appraisal must take into account the long-term effect of the four elements of a property’s value:

Demand – The level of desire (or necessity) to purchase a property combined with the financial ability to do so.
Scarcity – The supply of similar properties to meet demand.
Utility – The ability of the property to meet the needs of current and future buyers.
Transferability – The ease with which property rights can be transferred to future owners.
It’s important to point out that value is not the same as cost or price. Concerning real estate:

Cost is the money needed to build or acquire the same property in today’s dollars.

Price is what a buyer actually pays for the property.

Value is what the appraiser believes a buyer would be willing to pay for the property based on his assessment of the abovementioned four elements.

Value isn’t static or concrete. Most appraisals point to the fair market value, which assumes that both the buyer and the seller are reasonably knowledgeable about the property, acting in their own best interests, and free of external pressures that would result in a hasty transaction.

Real estate investors may need to know other types of property valuations. For example, value-in-use describes the financial benefit of a specific property for a specific use, such as the revenue derived from a beachfront vacation rental. Liquidation value estimates the price a property might bring if sold at auction in the event of foreclosure, for example.

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