Whether you are an experienced tokenized property investor or just learning the world of real estate, it’s useful to understand the key terminology and fundamental documents that may take part in a real estate transaction.
Here at NOVA, we review multiple documents while working with our investment properties, so we would like to share our experience and give you some basic knowledge that will help you better navigate your way through the real estate world. In this article, we will explain what is real estate appraisal report for residential property, how it works, and when it may be needed.
What is a real estate appraisal?
An appraisal is an independent valuation by a real estate professional. Its goal is to determine the property's fair market value.
Who benefits the most from a real estate appraisal?
The ones who benefit the most from property appraisal are the mortgage lenders. If a real estate investor would like to buy a residential property, and some portion of an investment is a mortgage, the lender would like to have some kind of third-party valuation of the property.
At first, it may sound like a bureaucracy and an additional unrequired fee to the transaction (usually, the borrower pays for an appraisal), but actually, the lenders’ logic makes sense. For the lender, it is crucial to make sure the property is worth the loan amount, so the appraisal report protects him from lending more than the property is really worth.
Do homeowners need a real estate appraisal?
For homeowners who would like to sell or exchange the property without a real estate agent and have no knowledge about the current market trends, an appraisal report could help to set a competitive price and avoid overpricing or underpricing the home. In addition, the report can show some general problems a property might have (if any).
The thing is that the homeowner might even not be aware of any problems with the property if, for example, the home was inherited and the succeeding party never actually lived in it. If such an unexpected problem with the property would pop up in the middle of the transaction, it could lower the property's market value, become a potential hard stop, and even break the deal, so it is much better to find out any issues in advance.
Whether an appraisal report is designed to identify all the specific problems or defects a property might have or not, it can still provide some general insights into the condition of the home and point out some issues that might not have been noticed. For example, if some improvements of the property are illegal by the local laws.
To identify all the defects and problems a property might have, it’s a good idea to order a home inspection report which we will take a closer look at in the near future. The main difference is that an appraisal report focuses on the property's value, while a home inspection report focuses on its condition and any issues that may need attention.
Do foreign investors need a real estate appraisal?
To foreign investors who buy an investment property to rent out on a short- or long-term basis and have no knowledge about the local market, an appraisal report could become an additional instrument that will help to determine whether a chosen property is a good investment.
The appraiser may include information about market trends and comparable rental properties; such information will give insight into the potential rental income investors can expect, based on similar properties in the area. It will help to set a competitive rental price. And again, knowing the accurate value helps to avoid overpaying for the property, ensuring a better return on an investment.
Both buyers and sellers can use the appraisal report as leverage in negotiations. For buyers, it can prevent overpaying for a property. For sellers, it justifies the asking price and gives confidence during negotiations.
Different countries and authorities may have different approaches to property valuation and license requirements, along with different standards and methods. However, the main idea is the same: An appraisal is a qualified professional’s valuation of a subject property market value.
How does real estate appraisal work?
But how does the appraiser determine the value of the property? Usually, appraisers use three main approaches to estimate the value:
As any human, an appraiser can make a mistake. If the buyer or seller thinks that the property is worth more or any data in the report is incorrect, buyer, seller or their real estate agent/broker can provide good arguments and try to convince an appraiser to change an opinion and correct the mistake.
Summary: Real estate appraisal
Just like appraisers, NOVA regularly tracks the market, calculates the properties’ appreciation and rental income as well as analyzes their potential.
An appraisal report is just one of many documents that take part in real estate transactions. We will continue our marathon of educational articles about real estate. As of right now, you can sit back and invest in tokenized real estate, where we already took care of all the paperwork including real estate appraisal and home inspection reports.
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