Appraisal

Posted in Finance, Accounting and Economics Terms, Total Reads: 1453
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Definition: Appraisal

An authorised person provides an estimate of the valuation/ current price/ net worth of property, generally real estate or a business, which is termed as appraisal. A valid appraisal entails that the appraiser hold a designation from a regulatory body governing the concerned jurisdiction, and that the appraisal be an impartial analysis.

A written appraisal is usually required when a property is bought, sold, insured, or mortgaged; or compensation claims are demanded for damages against an insured property.

‘Appraisal’ is also used as an alternative term for ‘valuation’.

There are 3 commonly used methods for appraising the fair market value of a property:

  • Comparison method: Here, the value of other comparable properties is used as reference and the fair price of the property in question is estimated after making requisite adjustments.
  • Cost method: Here, the production and replacement costs of the property, less depreciation plus land value (in case of real estate)are calculated to give a fair estimate.
  • Income approach: Here, the present income and  net present value of the future intended incomes from the business/ property is calculated to provide an estimation of the valuation of the same.

E.g.

  1. Property prices in various areas of the city are estimated by experts and published in newspapers.
  2. The net worth of a firm is estimated by authorised financial experts employed by the potential buyer of the company.

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