Real Estate Investment Appraisal - Why it is Important

Real estate investment appraisal is an important section of the real estate industry because it requires an individual to place an objective monetary value on an item (the real estate being sold and purchased) based on a host of sometimes very subjective factors.

There are many players in the world of real estate and property transactions and this sometimes makes it appear complicated for anyone on the outside looking in. In addition to the buyer and the seller, a whole host of other individuals become involved with every real estate transaction, including, but not limited to, loan officers, mortgage underwriters, and appraisers.

Real estate investment appraisal requires the appraiser to make a value determination on a piece of real estate for the purpose of ensuring a fair transaction. For instance, in terms of a mortgage, the bank providing the mortgage must be certain that their investment (i.e. the mortgage loan) will not be made on a depreciating asset or an overvalued one.

The lending institution uses the appraisal as an assurance that the value of the property is indeed correctly pegged to the realities of the time and not just on the price agreed between a willing buyer and a willing seller.

An appraiser may make any number of valuations of a property- market value, value in use, investment value, insurable value, or liquidation value.

Market value is the price that most individuals consider when analyzing the value of real estate. This value is the estimated amount that should be paid between a willing buyer and seller on the date of the appraisal based on condition and location of the real estate. In the world of real estate investment appraisal, this is also called fair value or open market value.

Value-in-use is a less common term and refers to the value of an item to a particular individual based on the benefit that individual can glean from the property. Because this valuation process is virtually shielded from many other factors that would determine property price, it is usually lower than the market value.

Investment value, on the other hand, is the value of a property to a particular investor. When one considers real estate as an investment, the investment value will usually be higher than the market value since the investor juxtaposes present value against the potential for a large return in the future.

Insurable value and liquidation value do not possess as many of the subjective elements inherent in the other categories of valuation. The insurable value is the replacement cost of the property as seen by the insurance company. This valuation therefore does not usually include the site cost (i.e. the land), but rather just the replacement cost of the structure on the site.

Liquidation value is a figure used when a seller is forced to liquidate their assets, such as during bankruptcy proceedings. It is generally lower than fair market value as one would expect from any fire sale.

Given all the variables and individuals involved in every real estate transaction, real estate investment appraisal requires a good amount of management and organizational skill. In addition, most states require that real estate appraisers hold certain certifications, and possess a minimum of a relevant Associate's degree for residential appraisal and a Bachelor's for commercial appraisal.

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