Sunday, May 8, 2011

The Evaluation of a Property

By Roman Schilzow

Whenever there is a property either being sold or bought, one important question should always concern buyer and seller equally before taking the final action in the transfer of ownership: What value does the property have? Indeed everybody is hopefully concerned about this question but the answer can be found in different ways. Beginning with having a gut feeling, an own evaluation, a competitive market analysis (CMA), a broker’s price opinion (BPO) to a formal appraisal, the options are various. However, the best decision depends on one’s own judgment, experience, existing data and what it is needed for/purpose.

Purchasing or selling a property due to having a gut feeling, might be the easiest, cheapest, but probably also the most delusive way. Surely, what we feel is not necessarily wrong and some of the best management decisions are made this way. Nevertheless, emotions, feelings and personal preferences might affect our judgment, which is what makes it difficult to reach an unbiased decision. Thus, before arriving too fast at a decision, it should be strengthened by research, not only made on the property but also other influencing factors such as the neighborhood, city council etc. Here, the internet is probably the most convenient source comprising of information about tax and sales information, tax records, and even pictures. These sources are usually based on commercial and governmental information.[1] With such information and some analysis, a property can be well evaluated with little time and effort.

Other forms of evaluation are represented by competitive market analysis and broker’s price opinions. CMAs are generally done by real estate agents who establish a selling price for a property. The evaluation contains an estimation of the value by comparing the property to similar ones that have been sold recently in the same area. Such reports usually are not as detailed as formal appraisals and do not represent one either.[2] Whenever a mortgage company or lender believes that a formal appraisal is not necessary, the real estate broker is asked to create a broker’s price opinion.[3] BPOs are divided into two categories: Drive by BPOs and Internal BPOs. As the name implies, a Drive by BPO includes only a drive by and taking a picture. The Internal BPO is more detailed and also includes facts about the property such as square footage and number of rooms.

Formal Appraisals represent the most detailed and reliable evaluation of properties. Compared to the previous options where the evaluation is either for free or for a small fee, formal appraisals are also the most expensive ones. Nevertheless, appraisers undergo a standardized process while evaluating properties. Here, all important facts are collected and analyzed by the appraiser. Such information includes economic activities and household demographics.[4] With this information, which is sometimes not publicly accessible or just not considered, appraisers are able to make precise evaluations of the property’s market value.

As mentioned above, property evaluation can be very different from each other. Depending on the individual needs and experience everybody can decide to which extent the evaluation covers. If I am an individual with experience in real estate, an evaluation based on own researches and feelings should be sufficient. If I am an investor instead, looking for real estate as an investment, a good appraisal is important or rather indispensable. Nevertheless, even with a good appraisal, the decision for how much somebody is willing to purchase a property, is eventually a gut feeling.


[2] William C. Spaulding; Real Estate Appraisal;


[4] Real Estate Analysis: Environments and Activities by Julian Diaz III and J. Andrew Hansz, Kendall Hunt, 2010.

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