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The purpose of an appraisal is to estimate the current market value of the subject property. The definition of market value is the highest price in terms of money which a property will 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.[1]
Every time someone purchases a property that involves bank financing, the bank will require an appraisal to be performed. The appraisal will verify that the purchase price represents a fair market value for the property. The appraisal attempts to protect the bank from mortgage fraud by funding more than the true value of the property.
Property appraisers are licensed in most states and there are multiple levels of licenses for property appraisers based on the type of property to be appraised. State requirements differ, but generally anyone can obtain their license as a state-registered real property appraiser by successfully completing a course and paying a fee. This person can only perform appraisals under the supervision of a state-licensed real property appraiser. Once a person has performed a certain number of hours of real property appraisals, taken additional classes, and passed an exam, s/he can earn a state-issued real property appraiser's license.
Some states offer a high-level license called a state-certified general property appraiser. The highest level of certification in the state is a state-certified general property appraiser. Any person who obtains this level of certification is able to appraise any type of property for any purpose.
Appraisals done on single-family homes are different than appraisals done on multi-unit properties. The biggest difference is that usually an appraisal done on a multi-unit property is done because the property is most likely to be used in an income-producing manner instead of as an owner-occupied property.
There are three methods used to evaluate a property in an appraisal: the "market approach," the "cost approach," and the "income approach." Single-family home appraisals are almost always based on the "market approach." The value of the property is based on the sales of comparable properties within the previous 12 months and usually within a half-mile radius of the subject property. The sales of the comparable properties are then adjusted up or down based on the features found in the subject property to generate the actual value of the property being appraised.
The appraisal of a multi-unit property is based on the "income approach" to reach the value of the subject property. With this approach the appraiser determines the fair market rent of each unit size based on comparable rents to other properties. The market rent can be adjusted downward if concessions are usually given in the target market. The appraiser will then multiply the target rents by the median Gross Rent Multiplier (GRM) for the target market to arrive at the fair market value of the property.
The approach used in performing an appraisal on single-family homes versus the one used to appraise multi-family homes depends on the use of the property.
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