Appraisal of real estate

Welcome again to Real Estate Economics. This is talk number 6 in the series and the third talk under the general topic of real estate markets. I'm John McDonald, Emeritus Professor of Economics at the University of Illinois Chicago and Emeritus Professor of Real Estate at Roosevelt University. This talk is about the appraisal of real estate.

Appraisal. The idea is to provide a formal estimate of market value of a property and then appraisal is done by a professional appraiser. The property is assumed to be sold by a normal seller to a normal buyer under normal market conditions. In other words, it's not parents selling a property to a child or not an arm's length transaction. You've got normal market conditions. That's a formal appraisal, and we'll go into the details of how that is done. In addition, however, there's what's called a comparative market analysis or CMA, which is an informal valuation done by anyone, including you. I'm going to suggest later that you actually do one.

The appraisal of a piece of real estate has several different uses. These include for the seller - determine a reasonable asking price. You want to sell your property, have an appraiser figure out, well, how much is it worth? You can also just use a comparative market analysis on your own or your brother-in-law can do one. You can also use it to determine how much insurance to carry if you are the owner, you want to insure your property. How much do you want to insure it for? For damages and so on. Local government, of course, is very interested in knowing how much your property is worth, because they're going to tax it. The property tax is based on an appraisal of the property. Also, upon the death of an owner, we want to know how much tax is owed for the estate, all of these uses. For the buyer, they can use an appraisal or a CMA to determine how much they are going to offer. Both sides of the transaction can use an appraisal or comparative market analysis as part of their process of hitting on a sale price. Finally, for the lender, and there usually is a lender involved, how much to lend the buyer? What should the size of the loan be? Indeed, lenders usually will require the formal appraisal. They will hire an appraiser and they may even have one on staff who does an official appraisal of the property, and what the idea is, they want to make sure that the property is worth more than the size of the loan.