Real Estate Appraisal – Part I (Definition and Types)

By Jorge Chávez
Mar. 30, 2022

When selling or buying a property it is common not to know the right price at which it should be advertised or if the amount requested for it is really fair. To solve this dilemma there is the Real Estate Appraisal. This estimation instrument takes into account a variety of factors that helps to give clarity about the real value of a property, beyond any personal appreciation.

Real Estate Appraisal

To clarify the key details, the Vallarta Real Estate Guide editorial team presents the general aspects of a Real Estate Appraisal.

Real Estate Appraisal

Real Estate Appraisal provides confidence to sellers and buyers in determining the fair market value of a property. It can be defined as a report on a property where its physical conditions and the local environment are analyzed to estimate its value within that context and at a certain point in time.

The valuation methodologies are universal, but there are three approaches typically used:

  • Cost Approach: This is the most basic, where the cost of bricks, the value of the land, as well as all special and complementary facilities are determined. The result indicates what that property would cost.
  • Market Approach: It involves reviewing what happens in the market during a certain moment, in an area close to the property that will be valued. In this approach, a series of samples is obtained and, through statistical methods, the value of the property is calculated.
  • Income Capitalization: It serves to estimate the value of the property according to what can be demanded for placing it in rent, that is, how much will be paid monthly without taking into account taxes or maintenance.

These three approaches are the fundamental ones, but the regulations can change according to the regulations of the state where the valuation takes place and its purpose. For example, if the appraisal has a mortgage purpose, that is, if what you want is to determine the value of a property to apply for a mortgage loan, the valuation must comply with the regulations established by the Federal Mortgage Society (SHF). If there is talk of any fiscal requirement, a cadastral appraisal is applied where each municipality issues different regulations through its taxing authority.

Types of Real Estate Appraisal

The main function of a Real Estate Appraisal is to offer clarity about the real value of a property. Both the buyer and the seller can request an appraisal during a real estate transaction. A buyer who seeks financing will need an appraisal as a requirement to obtain a mortgage loan, and a seller can seek one to know what the market price of house or apartment he is selling.

A real estate appraisal is very useful when selling/renting a property or applying for a mortgage loan to buy it, but it serves other purposes as well. In the same way, this instrument helps to carry out the calculation or rectification of taxes and/or to insure a property.

These are the different types of appraisals related to a property:

  • Mortgage Appraisal

Determine the value of the property to apply for a mortgage loan.

  • Fiscal or Cadastral Appraisal

It serves as basis for the payment of taxes, such as property.

  • Commercial Appraisal

Estimate the value of a property to know how it should be priced for sale or how much a buyer should pay.

  • Appraisal for Income Determination

It is a market income report with a current date or referenced to previous periods to calculate compensation for unperceived income, assignment of lease contracts or for review and negotiation of rents of current contracts.

  • Insurance Appraisal

Determines the cost invested for the calculation of an insurance policy on the property (usually excludes the value of the land).

  • Appraisal for Expropriation

When a property is affected by the occupation of land or the activity of a government entity, this appraisal is carried out to determine the value of the affected assets and thus be able to estimate the value to be paid for them.

  • Appraisal to Measure Development Potential

According to the type of building allowed in its Land Use and Density, this appraisal serves to know the maximum value of the land.

In the second part of this article that provides the basic aspects of a Real Estate Appraisal, the real estate valuation process will be reviewed, what is the relationship between the price of the appraisal and the final sale price, as well as the requirements to carry out a real estate appraisal.