For many people, appraisals – why they're done, how they’re done, and how they’re used – is a mystery. But that need not be the case! For all intents and purposes, appraisals are a straightforward and simple component in the process of completing financial transactions.
As it relates to real estate in general – and co-ops and condos specifically – appraisal is defined as an estimate of value, as for sale, assessment, and taxation. Appraisals are required for all types of financing, including individual co-op and condo loans, underlying permanent mortgages on cooperative apartment buildings, and even partial interest property rights, such as shared common areas in condominium properties.
Real estate appraisal is as much a science as it is an art. It employs established techniques and methods to arrive at consistent and reliable valuations. Ken Chitester, Director of Communications for the Appraisal Institute, a national umbrella organization for the appraisal industry based in Chicago, says: “Appraisal methodologies and techniques are consistent across the country. Each market is unique, but the methodology of appraisal stays the same and applies across the board.”
What sets appraising apart from other sectors of the real estate transaction process, says Jonathan Miller, President/CEO at Miller Samuel, a national appraisal firm based in New York City, is that: “In a real estate transaction, everyone has some sort of connection to the transaction except the appraiser. The brokers don’t get paid if the transaction doesn’t close, but whether the transaction closes or not, the appraiser gets paid. We are outside, neutral experts. There’s no skin in the game. Therefore, there’s a different perspective.” That generally keeps everything honest.
The Three Approaches to Value
Appraisal methodology rests on three approaches to determining value for any given piece of property. They are the cost approach; the comparable sales or market approach; and the income approach.