What is an Appraisal?

An appraisal is a valuation of the market value of an asset. It is derived by an experienced practitioner who creates a report, stating the reasoning behind a specific valuation. Appraisals are routinely conducted for a variety of properties, such as businesses, real estate and antiques. There are many reasons for appraisals, such as deriving a value for insurance purposes, for the sale of an asset, or to determine the division of property for an inheritance or divorce.

The Basis for an Appraisal

An appraisal can be based on several possible methods, of which the following are the most common:

Comparables. This is a search for comparable assets in the marketplace that have similar characteristics to the asset in question. The values of these comparables are then used to derive a value for the asset.
Cash flows. This is a model of the cash inflows and outflows associated with an asset over a period of time, which can be used to derive a present value. This approach is used for a business valuation or a rental property.
Replacement cost. This is an estimate of what it would cost to replace or rebuild the asset in question, based on current market conditions.