Real Estate

For as long as the lending industry has been in existence, the one granting the money has attempted to secure that loan by taking as many of the borrower's assets as collateral. In some cultures this meant offering such things as heads of cattle, flocks of sheep, or a daughter's hand. But determining precisely the "value" of these assets has always been somewhat subjective. What if the lender already has too many cattle to keep feed, or multiple flocks of sheep? The collateral you offer, in the form of cattle or sheep, will be of little value to the one doing the lending. However, if the lender has a marriage age son that is unattractive, and the borrower has a beautiful daughter, the perceived value of the collateral can be substantial.

Real estate is just another asset which is offered as collateral by those looking to borrow against it. The amount of money which a lender will offer in exchange for the securitization of that asset is directly related to its value. So how then does the lender determine the precise value of that asset to ensure that the underlying security for the loan is not worth less than the loan itself? The lender will engage the services of an Appraiser, an individual trained in the scientific art of valuation. Like in primitive times, judging the value of any asset is undeniably subjective. The question then becomes, "how does an Appraiser overcome this obstacle?"

There are three primary valuation methods used in valuing real estate: the Sales Comparison or Market Approach; the Cost Approach, and; the Income Capitalization Approach. Depending of the type of property being appraised, one or more of these valuation methods will be more reliable than the other approaches. Highest and Best Use analysis will also help the appraiser determine which appraisal method should receive the most weight in the final reconciliation of value.

Similar valuation tools are used in appraising cars, industrial machinery, timber, or business operations. The guiding light in the appraisal world is the USPAP (Universal Standards of Professional Appraisal Practice).

Despite the fact that the appraisal industry has prescribed methods and tools to measure and weigh various aspects of real property, and to analyze and scrutinize the real estate rights, many of these tools require the appraiser to use judgment, intuition, experience, and first hand knowledge of the markets they serve. There is NO substitute for primary source market evidence, and the expertise needed to properly analyze it.