Appraised Value

Appraised Value is the professional opinion of a qualified, impartial expert—an appraiser—on the monetary worth of an asset. While most commonly associated with real estate transactions (banks almost always require one before issuing a mortgage), appraisals are also performed for businesses, fine art, jewelry, and other valuable items. Think of it as a formal, documented estimate of value at a specific point in time. It is not a guess; it's a conclusion reached after a rigorous analysis of the asset and the market. The appraiser inspects the item's condition, considers its features, and researches relevant market data. The final figure, presented in a detailed appraisal report, is used for various purposes, including financing, insurance, taxation, and legal disputes. However, for an investor, it's crucial to remember that the appraised value is an opinion, not an immutable fact. It's one piece of the puzzle, not the whole picture.

An appraiser's job is part investigation and part calculation. They don't pull a number out of thin air. Instead, they rely on standardized methodologies to arrive at a defensible value.

A certified appraiser typically uses one or more of the following three methods, often reconciling the results to arrive at a final conclusion.

• The Sales Comparison Approach: This is the most common method for residential homes. The appraiser looks for recent sales of similar properties in the same area, often called “comparables” or “comps.” They then make adjustments for differences. For example, if your target house has a brand-new kitchen but the comparable house has an old one, the appraiser will adjust the value upwards. It's the real-world application of asking, “What are the neighbors' houses selling for?”
• The Cost Approach: This method asks: “What would it cost to build this asset again from scratch today?” It calculates the cost of the land plus the cost of construction, then subtracts an amount for depreciation (wear and tear, or becoming outdated). This approach is most useful for unique properties like schools or churches, or for new construction where comparable sales are scarce.
• The Income Approach: For investors, this is often the most relevant method. It values an asset based on the amount of income it can be expected to generate. The appraiser analyzes rental income, operating expenses, and vacancy rates to determine the property's net operating income (NOI). This income stream is then converted into a value, often using a capitalization rate. This method is the primary tool for valuing commercial properties like office buildings, retail centers, and apartment complexes.

The word “value” gets thrown around a lot. For an investor, knowing the difference between the various types of value is critical.

Market value (sometimes called fair market value) is the price an asset would sell for in a competitive, open market, assuming both buyer and seller are knowledgeable, willing, and not under pressure to act. An appraisal is an attempt to estimate market value. But the final sale price can differ. A bidding war might push the price above the appraised value. Conversely, a seller in a hurry might accept a price below it. In a financed transaction, if the sale price is higher than the appraisal, the bank will typically only lend based on the lower appraised value, forcing the buyer to cover the difference in cash. The appraisal acts as a safety net for the lender.

This is the most important distinction for a value investor. Intrinsic value is an investor's own calculation of what an asset is truly worth, based on a deep analysis of its ability to generate cash flow over its lifetime. It is a forward-looking, personal calculation that is independent of the current market price or a third-party appraisal. An appraiser might value a small apartment building at €500,000 based on recent sales. But a savvy investor might analyze the potential for rent increases, opportunities for expense reduction, and local economic growth, and calculate its intrinsic value to be €600,000. That €100,000 difference is where profit is made. The appraised value is a public fact; the intrinsic value is a private judgment.

So, what should a smart investor do with an appraised value? Use it, but don't worship it. An appraised value is an excellent data point and a powerful reality check. It can prevent you from getting swept up in market hysteria and drastically overpaying for a property. If you need a loan, you'll have to deal with it anyway. However, it should never be the sole reason for an investment. An appraisal is primarily backward-looking, relying on past sales data. A great investment is based on a forward-looking analysis of an asset's future potential. Your job as a value investor is to buy assets for a price significantly below your calculated intrinsic value, creating a `margin of safety`. Think of the appraised value as the starting price in a negotiation, not the final word on what an asset is truly worth to you.